by Eric Tupaz
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?
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 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 they appear to have the same purpose, all credit cards are not necessarily governed by the same rules. Not being able to plan your cash flow and not paying your American Express card credits can cause you much trouble.
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.
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.
This means that the interest rate adjusts to the prime interest rate. Thus, if the latter increases, HELOC interest rates will also increase.
And if the prime rate falls your HELOC interest-rate will fall as well. In some cases you can get a lower interest rate on your HELOC at a few points below prime rate depending on your financial situation.
When you use a HELOC mortgage, interest is calculated based on the outstanding balance of your HELOC. So if you make payments during the month, the interest will be calculated every single day and is 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 makes the variable method completely helpful.
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.
The first difference is that the home equity loan is for a specified fixed period. The interest on the home equity loan is fixed each month and you would pay interest based on the fixed-rate. This rate does not fluctuate with the prime interest rate mortgage. Think of this as a 30-year fixed loan.
The second difference with is once you borrow against it, you cannot borrow from the equity loan at any time. In order to draw funds from this equity loan you have to have sufficient equity in your home and refinance your home equity loan.
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.
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 have their own advantages and disadvantages.
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.
And heres another undisclosed fact.
Do you know that by using the HELOC as a checking account, you can slash at least 13 years off your primary mortgage and save thousands of dollars?
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.