HELOC

A home equity line of credit (often called HELOC and pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house.

Differences from conventional loans

A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the amount, similar to a credit card. At closing you are assigned a specified credit limit that you can borrow up to. During a "draw period" (typically 5 to 25 years), HELOC funds can be borrowed and you pay back only what you use plus interest. Depending on how much you use the HELOC, you will have a minimum monthly payment requirement (often "interest only"); beyond the minimum, it is up to you how much to pay and when to pay. At the end of the draw period, you will have to pay back the full principal amount borrowed either in a lump-sum balloon payment or according to a loan amortization schedule.

Another important difference from a conventional loan: the interest rate on a HELOC is variable based on an index such as prime rate. This means that the interest rate can - and almost certainly will - change over time. Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin the same way. The margin is the difference between the prime rate and the interest rate the borrower will actually pay. Lenders do not generally offer this information and it is up to the consumer to ask for it before taking a loan. [ [http://www.helocbasics.com/how-to-get-the-best-heloc-rates-and-terms/ "Negotiating the best HELOC rate"] , "May 19, 2008]

HELOC loans have become very popular in the United States in the 2000s, in part because interest paid is typically (depending on specific circumstances) deductible under federal and many state income tax laws. This effectively reduces the cost of borrowing funds and offers an attractive tax incentive over traditional methods of borrowing such as credit card debt. Another reason for the popularity of HELOCs is the flexibility not found in most other loans - both in terms of borrowing and repaying on a schedule determined by the borrower. Furthermore, HELOC loans' popularity growth may also stem from their having a better image than a "second mortgage," a term which can more directly imply an undesirable level of debt. [ [http://www.mtgprofessor.com/a%20-%20second%20mortgages/what_is_a_heloc.htm "Characteristics of a HELOC"] , "MTGProfessor.com, May 19, 2008] Of course, within the lending industry itself, a HELOC is categorized as a second mortgage.

It must always be kept in mind that the underlying collateral of a home equity line of credit is the home. This means that failure to repay the loan or meet loan requirements may result in foreclosure. As a result, lenders generally require the borrower maintain a certain amount of equity in a home as a condition of providing a home equity line.

HELOC freeze

In 2008 major home equity lenders including Bank of America, Countrywide Financial, JP Morgan Chase, National City Mortgage, Washington Mutual and Wells Fargo began informing borrowers that their home equity lines of credit had been frozen, reduced, suspended, rescinded or restricted in some other manner. [ [http://www.msnbc.msn.com/id/23453269/ "Home equity loans drying up for some"] , "MSNBC.com, March 24, 2008] [ [http://www.nytimes.com/2008/06/08/realestate/08mort.html?ref=business "Shrinking Lines of Credit"] New York Times, June 8, 2008] [ [http://www.bizjournals.com/wichita/stories/2008/05/12/daily50.html "WaMu reduces home equity credit to homeowners"] Wichita Business Journal - from the Puget Sound Business Journal, May 16,2008] Falling housing prices have led to borrowers possessing reduced equity, which is perceived as an increased risk of foreclosure in the eyes of lenders.

ee also

* Home equity loan
* Mortgage
* Loan to value
* Interest-only loan

References

External links

* [http://www.federalreserve.gov/pubs/homeline/ Federal Reserve site offering information on HELOC loans]
* [http://money.cnn.com/2006/11/03/real_estate/home_equity/index.htm "Should you tap home equity?"] - "CNNMoney.com", November 11, 2003