HELOC
If you are a homeowner, chances are you have a HELOC - Home Equity Line Of Credit.
Its popularity has grown due to rising home values, thus increased in homeowner’s equity. You can make use of that equity by taking out a HELOC. The increase in equity is not just paper gain, you can actually convert it to cash.
HELOC works like a credit card, but with lower interest rate, higher limit, and tax deductible interest. You take out what you need, pay interest only on it, and you have up to 20 years to pay off the principle. You can see why it’s popular.
The drawback is, it is tied to your house, a lien on your house. If you fail to make payments, you can lose your house.
Most banks offer HELOC with no fees. There is no application fee, appraisal, credit check, none whatsoever. However, there is usually an early closure fee, if you close your line of credit within two years.
The interest rate of HELOC is usually tied to the Wall Street prime rate plus a margin. How much the margin is depends on your credit score. If you have excellent credit, you can even have a margin of zero. That means your interest rate is whatever the prime rate is.
As the prime rate moves up or down, so does your interest rate and payment. Between 2001 and 2003, prime was dropping, even down to an incredible 4%. Homeowners were esctatic. They can take more money out and still maintain the same payment. For example, if you took out $20,000 at 5%, your monthly interest payment is approximately $83. At 4% interest rate, you can take out another $5,000 and your payment would remain the same. It’s like getting free money!
The recent rise in prime brought homeowners back down to earth. They see their payments go up steadily as the prime crept up a quarter percent every few months. With prime at 6.25% today, it is still affordable for most people to get a HELOC, to spend on perhaps a needed improvement on the house or their child’s college education. The monthly interest payment on $20,000 at 6.25% is just under $105.
Just make sure you know you can make those payments. If you don’t, you will lose your house.
(All calculations and terms described above are approximations, not guaranteed. Terms of HELOC vary according to the lender.)