All You Need to Know About HELOC Loans

A home equity line of credit loan, which are commonly known as HELOC loans, are a form of second mortgage on a home that has already been acquired by the person that is paying a mortgage on the property.

These HELOC loans have become incredibly popular for many as they will generally offer the best home equity loan rates as they provide adjustable rates that can be altered, rather than those fixed rates that can sometimes be rather high.

However, it is important to note that this may change over time, especially if the market rate increases, with these types of loans immediately seeing a rise when this happens.

A HELOC loan will typically be divided into a draw period of between 5-10 years and will provide homeowners with the chance to borrow against the line of credit, whilst a repayment period will also be created in which the money borrowed is paid back. This is where the aforementioned adjustable-rate comes in, although there is an interest-only loan during the draw period as well.

They work incredibly simply, with borrowers able to replay the loan without any penalty during the draw period and will then be able to borrow again when needed. A HELOC loan can be similar to a credit card in the way that they are structured, as borrowers will have a maximum credit limit that funds can be borrowed against. Minimum payments will only generally cover interest costs, but low-monthly payments can be made.

Advantages

There are a number of advantages to taking out a HELOC loan.

The first is the fact that the rates offered with these types of loans are generally lower than any other form of borrowing as they are secured loans. The loan is backed against the equity of the house, therefore rates can be lower.

Another advantage is that there is no restrictions on what the money can be used on when borrowed. Some may put restrictions or require justification for the need of the money, however a HELOC loan will allow borrowers to be free to do whatever they wish with it.

Interest on these kinds of loans are generally tax-deductible, therefore working in a similar way to the first mortgage acquired. Furthermore, qualifying for a HELOC loan is easier than other methods, especially for those with bad credit ratings and scores.

Finally, repayment terms such as the length of time provided can often be longer than other forms of loans. A HELOC loan may allow for a 5-10 year draw, before a repayment period of up to 20 years is available, whilst other loans may require the money back in 5-15 years instead.

Disadvantages

Naturally, there are going to be some disadvantages to using a HELOC loan, even if the advantages make them sound rather appealing as a second mortgage option.

The first of these is the obvious one; the fact that the house serves as collateral. If payments are not kept up to date, or a default is registered, then the home could be lost to foreclosure.

As mentioned, HELOC loans provide an adjustable-rate but this could be counter-intuitive for some. As they are adjustable, rates could increase at any time, which could make payments be higher each month and make it difficult to pay.

There can be an element of temptation attached to these loans as well, with the potential to borrow more than that is actually required. Having money is always nice and many will want to spend it on things they ‘want’ and not necessarily ‘need’. It is very easy to reach the limit without realising.

The last potential disadvantage to a HELOC loan is that the rates are higher than what would normally be paid for a primary mortgage, meaning more could need to be paid back than the first mortgage.

Conclusion

Of course, personal circumstances will help to determine whether a HELOC loan is the right type of loan to use, but it is important to weigh up the advantages and disadvantages wisely, otherwise they could be rather costly.