How Can A HELOC Loan Work For My Family?

How Can A HELOC Loan Work For My Family?

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HELOC is an acronym that stands for home equity line of credit. Unlike more traditional home equity loans, with a HELOC not all of the money is advanced to the borrower. With a HELOC, a line of credit is established and the borrower can take out sums provided that they don’t go over the credit limit much in the same fashion as a credit card.

Different than credit cards, home equity loans are not used for everyday expenses and are saved for important events such as college, home improvements or medical expenses. The borrower’s equity in his or her house is the basic collateral for a home equity line of credit in which a term period is established within which the borrower must pay back the amount in full.

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The interest charge on a HELOC is variable, unlike a conventional loan. Because of the fact that the determining factor in formulating the rate of interest is the prime rate index, it is imminent that the fee will change periodically. No lenders calculate the margin of a home equity line of credit the same, so this means that rates will differ significantly from lender to lender.

It doesn’t matter what it is called, financial institutions view a HELOC as a second mortgage. Because of the fact that about a decade ago the interest paid on a HELOC was deductible under both federal and a few state laws, they became quite common. Versatile borrowing and repayment plans are also factors in the HELOC’s increased attractiveness.

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Despite the minimum monthly payment obligation which is usually based on interest, any size payment greater than the minimum but less than the total amount is permitted. During the “draw period” of a HELOC loan, which is usually between 5 and 25 years, funds can be withdrawn. Final repayment of the loan occurs when the amount of the loan plus the interest is repaid to the lender.

The borrower’s house is the collateral with a home equity line of credit unlike traditional mortgages protected by non-recourse loans. Legal responsibility is a major variation between traditional loans and a HELOC as with a conventional loan the borrower is not personally responsible but with a HELOC, that is not the case. This distinction is tremendously important when dealing with foreclosures because the borrower can be considered liable for a recourse debt on a foreclosed home.

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