HOME EQUITY LOANS » HELOC

If you’re a homeowner and you’re trying to choose between a traditional home equity loan and a HELOC (home equity line of credit), then you need to be aware of their differences and similarities. They’ve got their pros and cons, of course, and these details could make a major difference in your financial picture.

One way in which HELOCs and traditional home equity loans are different is their payment system. A traditional home equity loan gives the homeowner the entire amount of the loan all at once, at the beginning of the loan’s lifetime. If that works for you then that’s going to be something in a home equity loan’s favor. By contrast, a HELOC’s full amount can be accessed over time, according to your needs. That means you can get as much or as little of your approved credit as you like, when you like.

Banks all over America are in the business of offering home equity lines of credit, more commonly known as HELOC. They’ve been used by millions of American home owners to get to the kind of credit line they need.

Some of the biggest names in the HELOC game are:

Home equity loans are frozen when banks and other financial institutions in the business of lending money stop lending out more money to protect from losses they might face, due to either subprime mortgage or any other high-risk loans. When this happens it is very hard for borrowers to get any money on their existing home equity loans. The biggest trigger for a freeze in home equity loans is a drop in the value of a borrower’s home, regardless of his or her payment history.

Most home equity loans are essentially lines of credit, allowing you to borrow money against the value of your home, and then pay it back, and then borrow more again, until you hit the limit the bank has imposed on your loan. It’s a lot like having a credit card. However, when a bank places a freeze on home equity loans, it means that you can’t borrow any more money – even if you’re making all of your payments on time and have a flawless credit history. The bottom line is that in many cases a bank’s lending freeze isn’t about you or other individual borrowers, it’s about the larger macroeconomic forces. Currently, the value of people’s homes are plummeting all over the country due to the dramatic bust in the real estate market. So as the value of a home drops, the credit line limit that was originally extended to the homeowner is now a potential problem for the bank: the borrower’s collateral is no longer worth what it once was, and that means the bank finds itself “out on a limb.”

Interest is calculated on a Home Equity Line of Credit (HELOC) by using a major interest rate index, such as the prime rate, plus the lender’s margin.

When you go shopping for a loan or line of credit, using your home as collateral, you might be tempted to get a HELOC, as opposed to a traditional home equity loan. HELOCs are more like credit cards than traditional loans because they can be paid off and then used again over the course of the contract, whereas a traditional loan is paid out in a single initial lump sum. Most HELOCs base their interest rate on the prime rate, which is set by the federal government. Most financial institutions use the prime rate as their fundamental benchmark for determining the interest rates they charge. When it comes to a HELOC, however, it is important to be aware that you may be charged an annual percentage rate based on the prime rate, but HELOC lenders will then add their margin to the prime rate – and they won’t tell you about this margin when you apply for your line of credit. That can really add up, especially since the prime rate can change on a monthly basis. In 1980, for example, the prime rate changed over 30 times. If the prime rate goes up, you’ll see your interest rate go up too.

The HELOC margin is determined by several factors, such as your credit history, credit score, as well as the total debt you have linked to your home (your initial mortgage, etc.).