The home equity line of credit (HELOC) and the traditional home equity loan are two entirely different things. Their difference can save you thousands of dollars and even 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?
But there is one huge difference.
A Visa or a MasterCard charges high interest rates and you will only be allowed to pay for the minimum balance every month. In contrast, the American Express card imposes extra charges when the creditor is unable to pay their accounts in full at the end of each month.
The purpose of the American Express card is to allow you to fund your purchases for 30 days but settle your balance immediately when 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.
The same applies to any HELOC and a home equity loan. Not knowing the difference could cost you thousands of dollars in extra interest payments. And one of them could help you slash at least 13 years off your mortgage if you would know how to use it.
Lets start.
HELOC interest rates are variable. This line of credit can be secured through your home and you can consider this as your second mortgage.
This means that the interest rate adjusts to the prime interest rate. Thus, if the latter increases, HELOC interest rates will also increase.
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.
Your outstanding HELOC balance will serve as basis for calculating your HELOC mortgage interest rate. So your interest rate will be computed per day if you make multiple remittances within the month. The result of the computation will be the interest rate that will be applied to your mortgage 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 the advantage of calculating interest using the variable method.
With the HELOC mortgage you can always pay down the HELOC and borrow from it any time. As long as you don’t exceed your HELOC limit, you can generally use it to keep borrowing money.
It is true that HELOC is almost the same as the traditional home equity loan. There, however, are two main points that distinguishes one from the other.
First, the home equity loan operates on a fixed time frame. You have to pay a fixed home equity loan interest per month and you will be paying a fixed interest rate. There are no fluctuations even when the prime interest rate changes. This mortgage will then be considered as a 30-year fixed loan account.
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.
The terms for the traditional home equity loan are fixed. So, you will be paying the same interest rate, the amount you borrow will remain unchanged, and your home equity loan payment term is permanent. This means you have to make your payments on time throughout the duration of your loan.
The HELOC loan, on the other hand, opens up the possibility of you paying for lower interest rates. The principal amount borrowed may even change over the repayment term of your loan.
Both these strategies also have their own benefits and drawbacks.
The one significant advantage of the HELOC that no one talks about is that you can use it as a mortgage checking account.
This means you can actually consider your HELOC as something that is similar to your regular checking account. You can use it to pay your bills and do online transactions every month as long as you deposit your paycheck into it.
Heres another secret that no one actually talks about.
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, you will be able to get $63,000 worth of savings without spending more or changing your financial lifestyle.
Because interest rates will vary and you will be able to withdraw and deposit money anytime, the HELOC is certainly one effective strategy that you can use in order to pay off your mortgage early and achieving a mortgage reduction strategy faster.
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