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HELOC Can Be the Most Prudent Choice for Consolidation Staff - Mortgage Lenders Plus.com

HELOC is a well-used acronym for a “home equity line of credit.” Home equity is simply the difference in the current value of the home and the amount of money that I owed on the loan(s) outstanding. The HELOC is one of three methods that homeowners have been using to extract cash from the equity that they have built up in their homes. The two traditional formats are a second mortgage, or home equity loan, and a “cash out” refinancing in which the first mortgage is paid off with a new, larger primary mortgage.

Both of these loans result in cash that is provided as a loan collateralized by the equity in the home. The third option available for extracting cash from a home with equity built up is through the HELOC or home equity line of credit.

Both a new mortgage and a second mortgage are going to have loan generation costs associated with them that are not a factor with a HELOC. It is cheaper to open an equity line of credit than it is to borrow all of the cash your equity represents in a lump sum. A HELOC requires that you make monthly payments only on the money that you have drawn down on your line of credit, rather than the entire amount available in the HELOC.

The interest charged on a HELOC is always an adjustable rate, whereas a second mortgage (or home equity loan) is generally a fixed rate loan. HELOC interest rates are going to be higher, on the average, than with a home equity loan – but you’ll only be paying on the money you’ve actually borrowed, and in any case you’ll be paying interest rates substantially below commercial credit card rates.

That’s why a HELOC can be the most prudent choice to consolidate high-interest, short term debt – which is the number one reason people cash out the equity in their homes. A HELOC allows you to borrow only the amount you need and make payments on that precise sum. A home equity loan may pay off your credit card debt and leave you with cash left over, but you’ll be making monthly payments on all of it. And that cash sitting in a bank account can be a temptation for further spending that somehow is less costly because it is money being paid off by a mortgage payment already built into the budget.