If you are not careful then using home equity credit line (HELOC) can prove to be a bit more dangerous than you bargained for. A home equity credit line is quite similar to using a credit card and so, just as you can get snowed under by credit card debts you can also end up on the wrong side of the credit company when you use the home equity credit line in the improper manner. However, at the time that you use home equity credit line, at closing you will be assigned a certain credit limit that you can then borrow against.
Home Equity Credit Line Draw Period
Next, there is what is termed a draw period that may last from between five and twenty-five years in which time you are allowed to borrow home equity credit line funds as and when you need to; furthermore, it is only necessary that you repay the amount you have used as well as interest on it.
What makes home equity credit line so attractive is that in most instances you only need to pay the interest till the end of your predetermined draw period and at the end of this draw period you will then have a few choices. These choices include paying back the entire principal that you have borrowed through HELOC or you can pay a HELOC balloon payment. Furthermore, you can also choose to pay according to the loan amortization schedule.
The home equity credit line can either work for you or against you depending on the way that you use it. Among the benefits you can hope to get from this form of credit are no HELOC application fees, no home loan appraisal or even closing costs and no account maintenance (HELOC) fees. In addition, there are also no usage fees.
It also pays to compare home equity credit line with conventional loans. The main point of difference between the two is that interest rates on the former are variable and depend on an index such as Prime Rate which in turn means that your interest rates will vary with the passage of time. The main reason why people choose home equity credit line is that the interest rates paid qualify for tax deduction according to state and federal income tax laws which means that the cost of borrowing money will be lower.
The fact that home equity line of credit tax deduction is permissible is what makes people jump at the chance to take home equity credit line. However, this can also prove to be counterproductive because you might fall into the trap of taking more credit than your home is worth and then you may not be able to sell off the property to pay back the loan and in this way become liable to suffering a home foreclosure.