Buying a home is a dream for people of all ages and backgrounds. However, property is a hefty investment. This is why loans are usually used to make such a purchase. One loan option is a home equity line of credit (HELOC). This type of loan is set up as a credit line that has a maximum line of credit. Here, the lender agrees to lend a person a certain amount of money at a predetermined time. This is different from a traditional mortgage because the borrower is not given the amount upfront. Instead, he or she has a line of credit from which they can borrow money. The money can be withdrawn by using a credit card issues by the financial group or by writing a check, among other options. In short, a HELOC is a lot like a property-focused credit card.
Refinance HELOC: Second Mortgages
Most HELOC options are second mortgages. People use these loans or credit lines to improve or remodel their home to increase its market value and improve the amount of equity they have or to do things like fund a business idea or education. Additionally, some people use HELOCs to refinance their first mortgage.
Interest and Refinance HELOC
People are required to pay back only the amount of credit or money they use plus interest. Thus, if the HELOC has a maximum of $50,000 but only $10,000 is used, the person only has to pay back the latter amount. The interest rate on the HELOC is different from a traditional mortgage because it can vary over time. Many people like HELOC options because the interest is deductible for federal and state. This means that people can borrow money and save money at the same time.
Draw Period on Refinance HELOC
People can use or draw from the HELOC for a certain amount of time. Additionally, a repayment period will be determined, too. Most people can use the line of credit for anywhere from 5 to 25 years and repayment is usually within 10 to 25 years. During repayment, many banks require that people provide payments that equal the balance at the end of the draw period divided by the number of months left in repayments. Other banks ask that an entire balance be repaid when the draw period closes, which results in many people refinancing. Thus, at the end of a draw period, one can expect the following:
- To pay back the full principal amount on the money borrowed from the HELOC
- Pay back the loan based on an agreed upon amortization schedule.
- Pay a balloon payment on the HELOC.
Cons of Refinance HELOC
The biggest con to this type of funding is that people borrow more than they need or more than they can afford, which can lead to big issues, even foreclosure. Folks somehow end up owing more on their property than it’s worth. Such individuals are sometimes referred to as Upside Down: paying sometimes twice as much as a home is worth. This happens when people ask for a HELOC that is worth more than the home is worth. Thus, if a person owns a home that is worth $100,000 and has a home loan for $80,000, it doesn’t make sense to apply for a HELOC for $150,000. And yet, some people do and are approved.
The lure of new money means that people almost always end up overspending, which in turn is a big issue if you figure in interest rates. Many people end up in foreclosure or struggle with monthly payments when a HELOC is not properly managed. This is why it’s important to be smart about how much money is borrowed: whether one really needs it and can afford to pay it back.
Benefits of HELOC
There are some serious benefits to HELOC. A HELOC gives people a flexible way to withdraw money to do everything from remodel a bathroom or add a room to a home to increase the property’s value to pay for school. For financially responsible individuals, this can prove to be a valuable form of funding.
There are usually fewer fees associated with this type of funding. There are no home loan closing costs, no application fees , no usage fees, and the interest rates can be tax deductible. Additionally, it is often possible to convert the HELOC to a fixed rate loan. This is important when rates begin to rise. Additionally, there is usually a periodic cap on interest rates. And the best part is that not only can people repay the principal whenever they want without paying a penalty but this type of funding frees up funds for people who have a number of projects they want to pursue.
The credit line feature of HELOC means that a person can work on paying off credit cards, work on remodeling projects, and pay for school. This flexibility is what lures people into applying for such funding. If people stay on top of what they owe and to whom, a HELOC could help an individual refinance their original mortgage or even other loans.
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