If you’re looking to make home improvements, pay medical expenses or finance a college education, your home can be a source of extra cash.
A HELOC, or home equity line of credit, is a loan that is secured by your property, based on the equity in your home. There are a number of advantages to obtaining a HELOC, according to Bankrate. First, it’s typically easy to be approved for a HELOC if you have a lot of equity in your home.
Additionally, if you’ve been thinking of taking out a second mortgage, it’s important to note that the interest rate on a HELOC may be lower, and you only pay interest on the amount you’ve borrowed on the line of credit, similar to a credit card, adds Bankrate. Unlike a conventional loan, you may keep borrowing on the unused amount, up to the maximum approved limit, as long as you keep paying down the line of credit. You may also pay less in closing costs. When a HELOC matures, you are required to pay off the balance all at once. You can apply to have the line renewed, which your lending institution may or may not approve.
It’s also important to note that, unlike a conventional loan, the interest rate on a HELOC is variable, fluctuating with the market. Monthly payments will vary, based on the amount of the line of credit you have used.
Don’t confuse a home equity line of credit with a home equity term loan. Both a home equity loan and a HELOC generally mature anywhere from 5 to 15 years, unlike a conventional mortgage, which usually runs 30 years. But a home equity loan is distributed in a lump sum and has a fixed interest rate with fixed monthly payments, adds Bankrate.You may not keep borrowing on it as you can with a HELOC.