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Investment Tip of the Day
The Wonders of HELOC
Most people have heard of a Line of Credit, but less know what a HELOC is. A Line of Credit is an agreement between a lender and a borrower (usually through a bank) for a loan that is to be paid back over a stretch of time with a specific interest rate attached to it. In most cases Lines of Credit aren’t really secured (but they can be) beyond looking at ones credit history/score. Because of that non-secured lines of credit tend to carry higher interest rates.
HELOC or Home Equity Lines of Credit is a secured version of a loan, using one’s home(s) as collateral. Because it is secured interest rates for HELOCs tend to be much lower than other types of loans. There are numerous types of HELOC offers/deals but in every one you only get charged interest upon using funds from this loan. However, some of these loan contracts may demand that you withdraw a minimum amount each month, ensuring interest payments to them. There is a set time frame when you are permitted to draw money, known as the draw period.
Withdraws from a HELOC can be done with assigned cheques or even through specialized credit cards for customer convenience.
Interest rates on HELOC vary with market conditions and so although you may take out a loan at one rate, one can expect this rate to go up and down throughout its existence.
Repayment methods and frequencies vary by provider. Some may demand you pay a lump sum at the end of its time frame while others may set specific amounts that are paid at consistent intervals. The moment you stop repaying is when the HELOC ends and potential foreclosure begins.
Unlike personal loans and credit cards, the interest on your home equity financing may be tax deductible. It depends on what that loan is used for. If it is towards earning income from a business or property then it is tax deductible thereby reducing the homeowner’s earned income and tax rate.