Who Should Consider a HELOC Mortgage?

Because of flexibility and low costs, HELOCs are popular with many homeowners.

A Home Equity Line of Credit, or HELOC, is a popular alternative to a standard home equity loan. A HELOC is a revolving credit line with your home as collateral, whereas a home equity loan is similar to your first mortgage and has fixed monthly payments.

Basics

HELOC loans offer flexibility for the homeowner who wants to use his home's equity to borrow cheaply. Because it is secured, home equity lines come with much lower rates than conventional revolving credit, such as credit cards.

Benefits

A major selling point of a HELOC is that the borrower can use the loan for virtually anything. Home improvements, vacations and auto financing are common uses. You can also pay back the loan at your own pace during the "draw" period, which is typically the first 10 years you have the line. Interest-only payments are common, with the option to apply principle.

Considerations

HELOCs are inexpensive by revolving credit standards, but you are adding an additional lien against your home. Failure to repay your equity line can lead to claims against your home just like with first mortgages. It is prudent to avoid using HELOCs for discretionary, or every day spending. HELOC benefits are more useful for financing projects or major lifestyle components that would be more expensive through other financing.

References

• Mortgage Loan: Six Advantages of HELOCs
• The Federal Reserve Board: What You Should Know About Home Equity Lines of Credit