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What Is the Difference Between a HELOC & a Home Equity Loan?

what is a heloc loan

by Barrett Barlowe

Taking money out of home equity can involve risk.

HELOC Defined

A home equity line of credit extends an offer of credit to a borrower up to a predetermined amount. Like a credit card, the lender puts a cap on potential spending. Unlike a credit card, a HELOC is a secured debt. The lender leverages a homeowner’s property against the loan. In exchange for lower rates than credit cards offer, a homeowner risks losing his home in the event he defaults on payments.

Home Equity Loan Defined

A home equity loan is a secured loan for a predetermined set amount. A borrower must show adequate income and a history of steady first mortgage payments to obtain prime or standard loans. Closing costs for

home equity loans vary; some homeowners elect to tack on the costs to the loan amount, limiting out-of-pocket payments.

Home Equity Line of Credit: Features

Home equity lines of credit are like credit cards in that no interest or payment is due until the homeowner actually spends money. Home equity lines work well for people who plan on doing improvements a few months down the line. Interest rates can fluctuate on equity lines, though, so there is no guarantee that the rate available the date a credit line opens will be the same when a person starts spending. Interest paid on HELOCs is tax deductible, which makes them a good vehicle for those seeking to consolidate other debts. Check with a tax consultant for specifics.

Home Equity Loan: Features

Category: Credit

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