Anyone who is looking for a home, or currently owns one, should be familiar with the pros and cons of a home equity line of credit, commonly referred to as a HELOC.
A home equity line of credit is a loan where you, the borrower, offer the equity in your home as collateral to the lender. When you do this, you get the money you're borrowing disbursed over time, as opposed to all at once. Normal old-fashioned home equity loans give you your loan in a lump sum, which you pay off over time (along with interest, of course). With a HELOC, you will get something that's much more akin to a credit card, with a limit that you and the lender have agreed to.
HELOCs are defined by what's called a "draw period," which normally run from 5 to 25 years. A draw period refers to the period of time during which you can borrow from your line of credit. Like a credit card, a home equity line of credit can be borrowed against and then repaid, with interest, as often as you like, so that if you stay on top of your payments you could be at zero balance within a few months or years of taking your first amount.
One important thing to remember when contemplating a HELOC is that the interest rate is not fixed lenders will link it to such indices as the prime rate, so it will definitely change as time goes by. That's something to think about, especially when compared with an attractive fixed rate.
Additionally, because of the current economic crisis, many banks are scaling back on their HELOC offerings due to the plunging value of homes across the country remember, your home is the collateral offered to the lender in a HELOC, and if it changes the lenders will get nervous.
Before you make any sort of a decision on a HELOC or any other kind of major financial commitment, be sure to sit down with your financial advisor and go over the issues in as much detail as you can. When it comes to your money, these uncertain times require as much diligence and planning as possible.
