Taking a Closer look at the HELOC
Posted on January 10th, 2007 by Blake Gratton under Mortgage
Looking to refinance and don’t quite grasp the concept of the HELOC loan? Should you go with a conventional or HELOC…
First let’s take a look at a Home Equity Line of Credit (HELOC). Think of a line of credit as a mortgage in which the bank lends you a maximum amount instead of a fixed amount. You’re able to use the line of credit like a credit card in which you’re only charged interest on the amount you’ve used. This differs from standard loans because the borrower is not advanced the entire sum of money up front, although it is possible to be fronted the money with a HELOC as well. There are positives and negatives when obtaining a line of credit and depending on what your short term or long term goal is, this may or may not be the mortgage for you.
Some of the major downfalls for obtaining a HELOC is its exposure to interest-rate risk. All HELOC’s are Adjustable Rate Mortgages ARMs but are much riskier than conventional ARMs. Changes in the market impact a HELOC’s rate very quickly. Example: If the prime rate changes on January 31, the HELOC rate will change effective February 1. Standard ARMs, in contrast, are available with initial fixed-rate periods as long as 10 years. The prime rate is based on the Fed Funds rate so when Ben Bernanke, the Fed Chairman raises the funds rate, then up goes your HELOC rate. Oh and did I mention that there are no caps on HELOC’s?
The upside of HELOCs include the low closing costs involved. Typically you can find a bank with great rates based on Prime that will pay all of your closing costs. The payments you’ll make on the HELOC are interest only which are minimal and most people enjoy the tax benefits involved (see your accountant). You still have the options of stated programs if your credit scores meet the criteria, and most banks can get the loan done in a week or two.
One reason I would recommend a borrower to obtain a HELOC would be for those who don’t plan on being in their home for more than a year and are looking to pay off other debt like credit cards, auto loans, college tuition, home improvements etc. The reason I say this is because unlike a conventional refinance where the fees involved thousands of dollars, it’s easy to find a local bank who are willing to pay your closing costs and give you a rate near Prime.
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January 10th, 2007 at 11:45 am
[…] In today’s market many people are starting to feel the pressure of having to make those high and forever changing Home Eqiuty Line Of Credit payments. The prime rate right now is at 8.25%, and we can finally thank the Fed for not adjusting the Fed Funds rate the last few times they’ve met. But with an ever changing economy and market, it’s still an uncomfortable feeling to have. […]