The difference between a home equity line of credit(HELOC) and a traditional home equity loan could save you thousands of dollars and slash 13 years from your mortgage
In essence, the traditional credit card and an American Express credit card are seen to be almost the same ” they ARE credit cards. How exactly are they different from each other?
What you do not know is that there is a significant difference.
Traditional credit cards, such as a Visa or Master Card, have higher interest rates and creditors are only allowed to pay their monthly minimum balance. The American Express card conversely allows creditors to fully pay off their balances at the end of each month so that they will not be charged for outstanding balances and interest.
The American Express card will cater to your purchasing needs for 30 days but you need to pay off your balance as soon as it is due.
So while credit cards seem to be just credit cards, they in fact serve two different purposes. If you do not plan your cash flow, you could be in trouble if you don’t make payments on your American Express card.
This concept also applies is the same with your HELOC and your home equity loan account. If you dont know the difference between the two, you might find yourself spending a lot on interest when you could have actually slashed 13 years off your mortgage account if you knew how to use it.
Lets begin.
A HELOC mortgage is a line of credit usually secured by your home. You can think of this as your second mortgage. The HELOC interest-rate is usually a variable interest-rate.
HELOC interest rates adjust to the prime interest rate. When the prime interest rate rises, your HELOC interest rate would rise with it.
So if your prime interest rate falls, you will get decreased HELOC interest rates as well. Depending on your present financial status, you will even be entitled to enjoy lower interest rates for HELOC which will be a few points lower than your prime rate.
Using a HELOC mortgage means your interest will be computed based on your current HELOC balance. So when you make contributions within a particular month, the interest will be computed per day. This is the interest that will be applied to your account.
This is the characteristic of the variable method of calculating interest. It is called as such because the interest that you will be paying will change daily.
This is enough to make you realize that making use of the method is completely to your advantage.
You can pay off your HELOC and borrow from it anytime as long as you dont exceed the HELOC limit.
Although the traditional home equity loan is quite similar to the HELOC, there are two characteristics that establish the difference.
One, home equity loan accounts are fixed. It operates on a specific period, there are fixed interest rates, and the amount that you will be paying per month will be the same. Even if your prime interest goes down, the rate that you will be paying will not change. This can be considered as a 30-year fixed loan plan.
Two, you can only borrow funds from your equity loan if you have adequate equity in you home and if you have refinanced your home equity loan. This only means that you cannot just borrow money from it any time.
If you require lump sum payments and you want to pay in small amounts monthly, then using the traditional home equity loan will be perfect for you. This will allow you to pay off your interest and at the same time allocate extras for your principal loan.
In all aspects, a traditional home equity loan is fixed. The interest-rate, the amount you borrow and the home equity loan payment term is fixed. You cannot change this and you’re expected to repay this mortgage over the life of the loan.
On the other hand, the amount you borrow and the interest rate that you are supposed to be paying may vary throughout the repayment of your loans term if you are on a HELOC loan.
Both have their own advantages and disadvantages.
HELOCs one important advantage that many people have failed to learn is that it can be used as a mortgage checking account.
This indicates that HELOC works exactly like your regular checking account. You can deposit your pay check into it and use it to pay bills and even make electronic transactions every month.
And heres one more thing that other people do not tell you.
When you convert your HELOC into a checking account, you are actually taking 13 years off your primary mortgage and save thousands of dollars in the process plus achieve a mortgage reduction strategy faster. .
In fact without changing your lifestyle or spending more you can save over $63,000.
Because the HELOC has a variable interest rate and will grant you the ability to withdraw and deposit money, you can use this as an effective tool to repay your mortgage early and achieving a mortgage reduction strategy faster.
