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Home Equity Line of Credit
Home Equity Line of Credit
© Money-Talk.org

Funding investments with home equity has become increasingly popular in recent years. It is one of the fastest-growing trends in the consumer loan market, and mortgage lenders have responded by making it easy to apply. With continued performance in the housing market and the availability of low interest rate loans, homeowners are in a good position to "cash in" on home equity.

Before applying, it is important to assess your financial needs and to stay informed about the home equity loan process. A home equity line of credit can provide an excellent opportunity to make property investments, but make sure you understand the basics of HELOC's in order to minimize your risk.

Understanding Equity

Home equity is essentially the difference between your unpaid mortgage balance and the value of your home. As you are able to reduce your mortgage or increase your property value, your home equity will also rise. There are ways to influence or quicken this process by making home improvements or making extra principal payments on your loan. Choosing a 15-year loan over a 30-year loan can help you build equity in nearly half the time. A 30-year mortgage with a bi-weekly payment plan will also enable you to pay off the loan quicker and allow you to benefit from equity gains. It is possible to quickly add value to your home by making home improvements or building additions onto your home. External factors that influence property value include your property location, your local economy, and the national economy. In recent years home prices have appreciated rapidly and several states have seen significant gains in home equity.

Home Equity Line of Credit

A home equity line of credit, also known as a HELOC, is similar to a second mortgage but provides an open-ended line of credit instead of a closed-ended. Similar to a credit card, a HELOC allows you to access and withdraw an amount from the credit line at any time as long as you don't exceed the credit limit. Typically, lenders will approve you for a specific loan amount that is based off an appraisal of your home's value. This is determined by subtracting a percent of your home's value from the balance left on your mortgage.

In recent years home equity lines of credit have gained popularity because of low interest rates. A HELOC is a variable-rate loan and is very appealing when the Federal Reserve sets low rates. However, rates can only drop to a certain limit before they begin moving up again. Market trends are moving in this direction and it may be wiser to take out a second mortgage with a fixed rate instead. This is especially true if you are planning on holding a property for an extended period of time.

Still, a HELOC can be a good tool for financing investments if it is used correctly. It can provide large amounts of money in a short amount of time, giving investors the chance to bid on foreclosures, auctions, or other property types. Keep in mind that your home is used as collateral for the loan and if you cannot meet the loan requirements you risk losing your hard-earned property.

HELOC vs Home Equity Loan

The main difference between a heloc vs home equity loan is the way you are able to access the line of credit. A home equity loan is set for a fixed amount of time and typically requires you to pay off the loan as a lump sum. It has a fixed interest rate and fixed payment amount. A home equity line of credit, on the other hand, offers you a revolving line of credit, which you are able to access at any time as long as you don't go over your credit limit.

Is There Any Risk Involved?

Before using a home equity line of credit for investment property, make sure to consult your financial advisor to determine if it's the right option for you. Most advisors will recommend home equity loans for investing if you are financially stable and won't need to rely on your investment to cover your mortgage. Still, regardless of your financial security there is some risk involved. If you don't receive your anticipated investment return and cannot meet the loan requirements, the lender could take your house as collateral to support the loan.

Make sure you assess all aspects of the loan contract before you sign it. There are many lenders to choose from and if you are concerned with the terms of a contract or a loan provider's credibility, simply take your business elsewhere. There are plenty who will offer you competitive loan rates.

Author Credit:

Houston Neal is a featured financial correspondent for online publications. He is a guest writer for Citylight Financial and works full time for 10-Spaces Consulting.

Citylight Financial is a resource for consumers interested in the mortgage process. They provide homeowners with tips about interest rates, mortgage programs, and mortgage lenders available on the web.

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