Escondido Real Estate

Escondido Home Buyer's Questions Answered: What Is HELOC?

HELOC, pronounced HEE-lock, is the financial industry's abbreviation for Home Equity Line of Credit. A HELOC is a loan with a maximum amount based on the available equity in the borrower's home. Equity is the difference between an Escondido home's value and the full amount owed on the home. A HELOC is different from an Escondido home equity loan because a HELOC is a line of credit rather than an advancement of an entire sum all at once.

There are both advantages and disadvantages to a HELOC. The biggest advantage most borrowers realize is the tax-deductible interest. In most cases, individuals who itemize when filing their federal income tax can deduct the annual interest paid on a HELOC. A HELOC is also not viewed by creditors the same way as a second mortgage in terms of overall debt. However, a HELOC is not advantageous in every circumstance.

• flexible

• variable interest rates

• tax deductible interest
  

The disadvantages of a HELOC include variable interest rates, which are almost always the case. This means that in most situations, the interest rate attached to a HELOC will rise over time. How much and how often depends on the lender's terms and the borrower's credit rating. Additionally, many times a HELOC requires only regular repayment of interest only, meaning the principal may never decrease if the borrow pays only the minimum payment due each month.

A HELOC has a degree of flexibility that other loans do not have, including access to a maximum amount without actually using it and varying degrees of repayment terms. Though a HELOC is different than a home equity loan or second mortgage, it is still a loan secured by the borrower's home as collateral. Thus, failure to adhere to the agreed upon terms of a HELOC can, and often does, result in foreclosure. Before agreeing to a HELOC as a way of funding a major purchase or creating accessible credit, it is best to consult with a financial advisor or lending professional.

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