Home equity line of credit or HELOC’s as they are commonly known, work very similar to the credit cards we carry in our wallet. There are, of course, a few key differences. The HELOC uses security or collateral for the credit line, namely one’s house whereas credit cards are usually unsecured. This allows the HELOC creditor the option to foreclose and recoup any losses. Because of this collateral, the risk is considered lower, the credit line amounts are higher and the interest rate charge is lower when compared to a typical credit card. Other than that (along with the process of getting a HELOC versus a credit card), HELOC’s work the same way as a credit card – more of a financial tool one can charge up then pay down utilizing it over and over thus providing flexibility versus a traditional installment loan first mortgage. Another great feature is only paying interest on the amount of the outstanding balance, not the entire line. For this reason, HELOC’s are a great solution for any “tragedies or opportunities” that may arise – giving one the chance to quickly drawn down and get cash when needed. Drawbacks to a HELOC is that they’re tied to the Prime Rate and subject to change (meaning an increase in the interest rate) versus a fixed rate mortgage. In 2022, the Federal Reserve is expected to raise interest rates (affecting HELOC’s) perhaps as many as four to five times. This means one could end up paying more than bargained.
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