HELOC - How do they work?

[jmsaj]

I am thinking of getting one of these instead of typical equity. How do these work? Can you use the funds for anything?

 

[SmileWoman]

I am not sure that I understand your question but I can tell you that HELOC stands for Home Equity Line of Credit. It is a lien against a home or investment property. It is generally a second mortgage but would be in first lien position if you do not have a first mortgage.

You can use HELOC funds for anything you want. The bank does not care because your property is the collateral. Once you have the HELOC, you generally can access it by check, debit cards, transfers to your checking account, etc.

 

[neatokimmo]

Usually HELOCs are limited to a certain percentage of the value of your house. I know when I got one, the house was paid off and they offered an 80% line that I turned down, I didn't need that much.

 

[GreyGooseCosmo]

A HELOC is a Home Equity Line Of Credit. It's a revolving loan secured by a mortgage on your home.

A traditional Home Equity Loan is a set-amount loan, secured by a mortgage on your home.

A few things to keep in mind:

These are mortgages. On your home. If you fail to pay the loan, the bank will foreclose.

The interest on these loans are better than most credit cards, but that's because you secure the loan with your home.

Did I mention that these are mortgages on your home?

Really, they should be a "last ditch effort" for survival.

 

[Kellydelly]

Can anyone even get a HELOC anymore with the way the economy is?

 

[mikehn]

Can anyone even get a HELOC anymore with the way the economy is?

Great question. You probably can if you have stellar credit. I got one about a decade ago that is still open. There's no balance on it. I just have it there in case I need it.

 

[PatsMom]

We see people getting HELOC's frequently. Rates are very low right now. You do need to have good credit. You might also have better luck with a local bank or credit union than a national company. But if you still have equity in your home and good credit, you can get the line. The problem for many people is that the home will no longer appraise for the 80% loan to value ratio. They owe more in the primary mortgage than the house is worth! And 80% is about as far as most lenders will go. Back in the big loan days, we saw people who had HELOC's that went to 120% loan to value. That was just insane and the kind of thing that has contributed to this whole crisis!

A HELOC can be a good source of funds if you are relatively sure you can repay. Like any mortgage, you have to consider the fact you could lose your home if something happens and you default. HELOC's also make a good source of emergency funds - but you need to have it set up before the emergency happens. And they are not as good as cash in the bank!

The typical HELOC that I've seen has a 10 year draw. That means you can write checks, etc up to your credit limit for 10 years. During that time you have to re-pay at least the interest each month (although you could do that by drawing on the home equity line - we saw some financially ill advised people doing that!). After the 10 years, you either refinance into a new HELOC or there is a repayment period like a traditional mortgage. Most refinance into a new HELOC or a traditional mortgage that includes both the HELOC and the primary mortgage.

 

[jmsaj]

I have a reg equity that we used 20K out a 50K approval; so I do know that the house is collateral like a mortgage. We are fortunate enough to be on the upside unlike so many people. I just was not sure exactly how they worked for spending and paying for things and was asking for some more info.