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Home equity line of credit (HELOC)
If you need to borrow money to pay off debts or make a major purchase, a home equity line of credit (HELOC) can be useful. A HELOC is a form of revolving credit secured by the equity in your home. This is an open ended loan that can be paid down or charged up for the term of the loan, much like a credit card. The interest rate can fluctuate (typically as the prime rate changes). Newer versions of this loan allow you to "lock" a fixed rate for a portion of the outstanding balance.
With a HELOC, your lender will approve you for a specific amount of credit - the maximum amount you may borrow at any one time under the plan. In determining your credit limit, your income, debts, credit history and other financial obligations will be reviewed. An appraisal may be required on your home to determine the home's market value. Your credit limit will be based on a percentage of your home's appraised value, which is then subtracted from the balance owed on your existing mortgage.
When you take out a HELOC, you pay for many of the same expenses as when you financed your original mortgage, such as an application fee, title search, appraisal, attorneys' fees, and points (a percentage of the amount you borrow). MetFund has HELOCs available where the lender pays the closing costs (ask for details).
Most HELOCs have a fixed period (5, 10, even 20 years) during which you can borrow money. Typically, you will use special checks or a credit card to draw on your line. You will be required to make a minimum payment each month - usually the interest that accrued during the draw period. However, the interest you pay is usually tax deductible. At the end of your "draw period," you will be required to pay off the loan, making monthly payments on the principal and interest.
Even if you don't need the funds at the moment a HELOC is an excellent financial tool to have available for future unplanned expenses. It is sometimes far easier to borrow the money when you don't need it than when you do.
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