Home equity line of credit

There are basically two types of home equity loans, HELOAN and HELOC. HELOAN has a fixed interest rate. The borrower usually receives a check for the entire loan amount immediately after closing (technically, three days after closing). The monthly payment, consisting principal and interest, is fixed for the entire loan term.

HELOC is a line of credit, much like the line of credit your credit card issuing bank extends to you, with your home as the collateral. The borrower may make withdrawals and repayments as often as needed, up to the credit limit. The interest rate is adjustable, usually pegged to a certain index, such as the Prime Rate published in the Wall Street Journal. Monthly payments vary depending on the outstanding balance and interest rate. Required payment consists only of the interest charge on the amount owed for the preceding month. Repayment of the principle is not required until the second half of the loan term.

If your equity is sitting in your house it's not making money for you. You can take out a loan for the equity or a portion of the equity in your home and invest in a growth fund and accumulate the funds to pay off your house faster than if you just paid down on your one mortgage. You equity it's self doesn't have value until you use it. And your interest is tax deductible.

Use a home equity loan for major purchases such as a new car, boat or motor home. The interest rates and payment amounts are sometimes much more appealing than a regular line of credit or loan.

HELOC or Home Equity Line of Credit mortgages are very often used as the 20% second mortgage component of an 80/20 style 100% financing deal.

Most home equity lines use the prime rate as a base for setting interest rates. For example, you hear lenders describe rates as prime + zero or prime + 1. This means the borrower will pay monthly interest according to the Prime Rate (lets use an example prime rate of 7.5%) plus a margin. In this case, prime + zero would equal an interest rate of 7.50%, or in the case of prime + one it would be 8.50%.