Features & Benefits of HELOC
Have you ever imagined what wonder equity could do for you, if not, then put it in your home to see how it works? A HELOC can pay for your home renovation, for your child's college fees and can be useful in unexpected emergencies and during many more situations. Further, you have access to your credit line for an initial period of 10 years without reapplying for the loan. There are many things that you can do with a Home Equity Line of credit, the key lies in knowing the features and benefits of the HELOC.
If you are someone who is considering Home Equity Line of Credit, then you will come across many information about it, and it will be overwhelming for you to sort the available information to make a perfect decision. Not to mention financial decisions involve lots of analysis and you can't take them lightly. So it becomes imperative for you to evaluate all your available options. There can be many elements that can influence your decision, still below are three features of HELOC that are worthy to be considered before you proceed for a HELOC.
Know the minimum draw limit
Usually, a HELOC has a 30-year term, and it includes draw period and a repayment period. The first 05-10 years are draw period and the remaining 10-20 years are repayment periods. During the draw period, one can withdraw as much money as they required, provided it should be within the credit line. Borrowers are required to make interest-only payment on the amount withdrawn during this period.
In most of the cases, the lenders require a minimum amount that the borrower has to take out before closing, and this amount is known as the minimum draw. Such amount applies to the draw period. For instance, you have a requirement of $ 500 from your HELOC to avert a fee. The amount varies from lender to lender, but the borrower has to ensure that their minimum amount is not too high. The reason of it is simple as no borrower wants to take out money exceeding their requirement or they don't want to pay a fee for not meeting the requirement of minimum draw amount.
Margins and interest rate charges.
HELOC has a variable rate of interest, that means the rate gets adjusted with the changes in the index to which it is attached. It makes the borrowers come across prime rate plus a margin. The margin is a sum of the amount that is added to the prime rate to the device the rate of interest that will be applicable on the culmination of the introductory period. Several elements play a vital role in determining the margin, out of which the amount of equity supporting the Home Equity Line of Credit and credit scores and are most prominent.
Cost and Fees
If you are about to open a Home Equity Line of Credit, you will come across certain fees and closing costs attached to it, and you have to be aware of such fees and costs from the inception. They vary from lender to lender, and closing costs are relatively small and ranges between 0-4% of the total loan amount. Appraisal, credit report and application fees are some of the examples of these fees. For exact details, it is always advisable to refer the lender's HELOC disclosure.
Incurring additional financial debt is neither appreciated nor considered as a wise financial decision. However, HELOC offers a good range of benefits that makes it worthy to be considered.
Although HELOC comparatively carries a higher rate of interest than an original mortgage loan. But the rates are lower than what is charged by most of the credit card and short term loan providers. With the use of Home Equity Line of Credit, one can pay off higher interest rate debts slowly and gradually without being struggling to keep up with inflating interest charges. But one thing that every borrower has to keep in mind that their home is the collateral and failure to make payments can lead to foreclosure proceedings.
It is essential to make payment against charges on HELCO to curtail the balances. Still, there is a lender who does not require the monthly payment of the principal amount. It can be beneficial if you are going through the financial crunches, as you can go for interest only payment option until you overcome the financial binds.
You can claim the interest paid on HELOC as a tax deduction, provided its size should be less than $ 50,000, and the limit is $ 100,000 for married couples who are filing for it jointly. And this deduction is not available in other forms of revolving credit like credit cards, because of which most of the people prefer HELOC on credit cards and other personal loan options.
Once your lender approves your HELOC application and you start making payments, the account will start reflecting on your credit report. It will improve your payment history, and you will have a better credit rating and scores. And if you are charging less than thirty percent of your HELOC limit, it will also help you to improve your credit scores or rating.
The above mentioned are only some of the highlighted features and benefits of the HELOC; there is a lot that you need to know. We are there to provide you best of the information to make a sound and wise financial decision.