Different than credit cards, home equity loans are not used for everyday expenses and are saved for important events such as college, home improvements or medical expenses. The borrower’s equity in his or her house is the basic collateral for a home equity line of credit in which a term period is established within which the borrower must pay back the amount in full.

The interest charge on a HELOC is variable, not like a conventional loan. Usually, that fee is determined according to the prime rate index, which means it can and often does fluctuate over a period of time. It is also imperative for the borrower of a HELOC to know that lenders calculate the difference between the prime rate and the interest rate (also known as the margin) differently.

People in the lending industry consider a HELOC to be the same as a second mortgage. HELOCs were quite popular ten years ago in part because under some circumstances, interest payments were deductible under federal and some state laws. Several borrowers are drawn to HELOC because it offers repayment and borrowing strategies that are flexible.

A borrower can make any size payment as long as it is less than the total amount and at least the minimum obligation, which is normally evaluated on the basis of the rate of interest. Funds from a HELOC loan can be withdrawn during what is identified as the “draw period,” which is usually between 5-25 years. Repayment consists of the total drawn plus interest.

The borrower’s home becomes the collateral with a home equity line of credit unlike conventional mortgages secured by non-recourse loans. Non-recourse loans have no liability, but with a HELOC loan the borrower may well be liable. A recourse debt in the case of a foreclosure proceeding can force a borrower to be personally liable.

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Home market values are in a constant state of flux. The difference between a home’s market value and any outstanding mortgage(s) equals the available equity. For example, if a home’s value is estimated at $280,000, and you owe a mortgage lender $180,000, the available home equity equals $100,000. With either a home equity loan or line of credit, the homebuyer may choose to access all, or part of the home’s equity.

What Makes a Home Equity Loan Unique?

Home equity loans are similar to other types of personal loans. In most cases, personal loans are secured with some piece of property that has inherit value as collateral. With a home equity product, your house is the collateral.

Most home equity loans offer competitive fixed rates and payments that are amortized over 15 years. At closing, the homeowner receives the funds in a lump sum which can then be used towards any purpose. As with most loans, the homeowner may choose to pay the loan off faster than scheduled.

Why Should I Choose a Home Equity Line of Credit?

As with home equity loans, lines of credit are also based on the home’s available equity. However, instead of funds being supplied in a lump sum, credit lines are essentially revolving credit accounts. For example, if approved for a $150,000 credit line, a revolving credit account is established for this amount, and homeowners are free to withdraw funds up to this limit as necessary.

Lines of credit are similar to cash advances from a credit card. However, interest rates are much more favorable than those offered by credit card issuers. Once money is withdrawn, payoff must be completed within 10 years in most cases. Since line of credit rates are variable (using some factor of either the prime rate or LIBOR), homeowners should expect payment amounts to change.

If you’re shopping for a home equity loans or home equity line of credit Easy-Home-Equity-Loans.com can assist. Check out our website for today’s rates, assistful commentary and tips on securing the best home equity product for your needs.