A HELOC is a form of secured loan where you home serves as security. It is a form of revolving credit that allows the home owner to borrow any amount up to a pre-determined maximum. With a HELOC you can access up to 65% of the value of your home. Your fixed mortgage balance and your HELOC together cannot exceed 80% of the value of your home.
As you repay the principal, you are allowed to reborrow the money. You can borrow what you need when you need it and you only accumulate interest on the funds that you have used.
There are two types of HELOC’s a combined HELOC, also known as a re-advanceable mortgage, and a standalone HELOC
- A combined HELOC – combines a fixed term mortgage with a HELOC. The fixed term section must be paid according to the payment schedule which covers the interest and a portion of the principal. As more of the principal is paid off so the HELOC expands to allow the homeowner to access more funds.
- A standalone HELOC – with this form of financial instrument you need only pay back the interest.
The benefits of HELOC’s
- A HELOC can make access to funding relatively easy
- Because they are secured loans the interest rates are lower than you’d pay on a personal loan, and you only pay interest on the amount that you have borrowed
- You can pay it back at any time without incurring penalties.
The disadvantages of HELOC’s
- If you are not disciplined you could run up a large amount of debt
- The bank can reduce the loan amount at any time they choose.