A HELOC, home equity line of credit, is a tool used by homeowners to access equity in their homes. HELOCs do not amortize but rather work a lot like credit cards.
Amortization is a method used in mortgage and other types of loans. Loans that amortize have regular monthly payments over a specific period of time. Amortization takes interest costs into account when monthly payments are calculated. Amortization is a process that gradually decreases the amount of the loan, both principal and interest, with payments in the early months applied mostly to interest. When the loan ends, the loan is paid off in full.
A HELOC is a type of loan where a homeowner is offered a line of credit that has a maximum limit. A homeowner withdrawals money as needed and makes minimum monthly payments to the lender. It works like a credit card, where the balance eventually is paid off, but without a specified time period. Interest is accrued monthly based on the amount the borrower has withdrawn.
A HELOC offers flexibility for homeowners. A homeowner accesses the line of credit when needed and can take up to the maximum amount. It can be repaid at any time, but monthly minimum payments are required. HELOCs generally have no closing costs and operate on variable interest rates.
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