Mortgage / Equity

Home Equity

HELOC is an acronym for home equity line of credit. Many lenders’ websites and financial professionals will use HELOC instead of the words home equity line of credit.

A HELOC is an agreement between a lender and a homeowner that makes a set amount of credit available to the homeowner. The credit is secured by the equity in the borrower’s home.

Equity is the difference between the value of your home and the amount it is mortgaged for. If your home is worth $500,000 and it is mortgaged for $250,000 you have $250,000 worth of equity.

Most HELOC agreements limit the amount of credit available to a percentage of the amount of equity usually 80%. This means that a person with $100,000 equity would have a line of credit of 80% under the average HELOC.

How the Cost of a HELOC is Determined

The cost of a HELOC is determined by the interest rate that the lender charges on it. The base interest rate for a HELOC is usually the standard mortgage interest rate.

Other factors that can affect the HELOC interest rate are by the geographic location of the home and the borrower’s credit rating. Borrowers with a good or excellent credit rating usually pay a lower interest rate. Borrowers with a poor or bad credit rating will usually pay a higher interest rate.  

The interest rate is added to the amount of money borrowed to determine how much the homeowner will have to pay back. The interest rate is how the lender makes its profit when issuing a HELOC.

HELOC vs. Home Loan

The advantage of HELOC over a home loan or home equity loan is that a homeowner can limit the amount borrowed. For example a homeowner making repairs could limit the HELOC only to the cost of the repairs. This can limit the amount of money that the homeowner needs to pay back.

Another advantage to a HELOC is that it is always available. The homeowner doesn’t have to go through all the hassle of filling out loan paperwork just to borrow money. This means the HELOC funds can be available in an emergency situation.

A homeowner who expects to make a lot of repairs or do a lot of remodeling would be well advised to get a home equity line of credit. Having a HELOC available can stop the borrower from running up charges on credit cards.

How to Get a HELOC

The best place to find a HELOC is online. By going online a homeowner can locate lots of home equity loan offers. Simply typing the term HELOC into a search engine can produce a list of offers with low interest rates.

Using the calculators on websites a homeowner can compare a large number of HELOC offers and get the best interest rate available. Getting a HELOC can give a homeowner a source of low interest credit that they can tap into at any time.