What Are Heloc Loans?
Heloc loans offer existing home owners an opportunity to take out another loan – the Heloc – through an equity line of credit. The amoutn of the Heloc loan depends on the existing equity you have in your real estate portfolio. Many first time home owners choose a Heloc loan once the time comes to buy an investment property. Rather than borrowing the whole loan amount as in a traditional mortgage, a Heloc loan allows borrowers to draw money whenever they need it, up to the maximum amount of the loan. They can do this with a special issued credit card or via check.
Heloc loans have a draw date, meaning they have an expiry period of between 5-10 years in general. In the second mortgage industry Helocs are actually very popular because they are convenient and are easy approved as long as you have equity in your home. But as it happens, everything that comes by “easy” also comes with plenty of risk.
Many Heloc clients find themselves in need of having to take out a refinance option when their Heloc draws to a close. This is because some need to be paid in full and some people find they have not enough money to pay. This can be very expensive. Before you borrow money on any loan, make sure to read the small print first.
Another risk factor of Heloc loans is their ties with the adjustable mortgage rate, also called ARM. These rates depend on the national prime rates and depending on the current state of the economy this could be a good thing or bad. Calculate rate increases into your loan term to assure you can keep up with payments.
Helocs certainly offer fast access to money when the need arises, whether it be for school fees, renovation projects, trips abroad or even to pay off existing credit card debt.
While they certainly are very convenient, Helocs are also dangerous. Some borrowers simply forget that they are expected to pay back their “advanced money” over time. Or else they short-change themselves with the wrong budget. This can become costly and might requie a refinancing loan later on. Be sure to design a realistic budget that can be executed, regardless of your situation.
Heloc loans are attractive for many home owners because they are convenient and usually approved fast. But before you consider a Heloc to be your only option talk to your accountant first.
Extending the equity in your home makes sense as long as you have a secure job and finances. Unfortunately today this becomes more and more an issue as job cuts are a common occurence in many industries.
So, in closing, be wary of easy to come by Heloc loans and get all the relevant facts before you rush into yet another loan contract.