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HELOC Loans: What is a Home Equity Line of Credit?

by Gabriel Traverso
CMR Columnist

What is the difference between a standard mortgage and a home equity line of credit (HELOC)? How do you know which one is right for you?

HELOC vs. Standard Mortgages

HELOC is sometimes referred to simply as a home equity line. HELOC loans are set up as a maximum draw rather than as a fixed dollar amount like a standard home equity loan or second mortgage. For example, with a standard mortgage if you borrow $100,000, you pay on the full amount over time and completely repay it when you sell your home. Using a home equity loan, the lender promises to advance you up to $100,000--you choose the amounts and times. You can draw on the loan by writing a check, using a special credit card, or in other ways designated by the lender.

When to Consider a Home Equity Loan

HELOCs are generally used for intermittent costs such as home improvement, paying off credit card debt, or other personal finances. With a HELOC, you only pay interest on the portion used--not the entire approved loan amount. Home equity loans and home equity lines of credit are almost always a second mortgage. The disadvantage of a home equity loan is the exposure to high mortgage interest rates, because the loan is based on an adjustable index. Market changes could cause your mortgage interest rate to go up and your payments as well. You need to plan for this eventuality.

Careful Consideration

Before beginning the process of opening a home equity loan--carefully consider your goals. Are you using this loan for home improvements or to pay off a high interest credit card? Ask your mortgage banker or loan officer plenty of questions and make sure you consider your financial situation, and then make the choice that's right for you.

About the Author
Gabriel Traverso is a freelance writer, professional musician, and artist. He resides with his family in Reno, NV.

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