HELOC means a type of home equity line of credit. It differs from the more conventional home equity loan in which the borrower is advanced all the capital up front. With a HELOC, a line of credit is determined and the borrower can cash out sums provided that they do not go over the credit limit much in the same fashion as a credit card.
Usually home equity loans are not utilized for day-to-day expenses and are reserved, unlike a credit card, for more significant circumstances, such as unexpected medical expenses, college and home renovations. With a home equity line of credit, the security for the loan is the borrower’s investment in his or her house and the financial institution agrees to a term in which the whole debt must be repaid.
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The fact that the interest rate on a HELOC loan fluctuates marks a primary difference from other home equity loans. Normally, that rate is determined by the prime rate index, which means it can and frequently does change over the course of time. It is also imperative for the borrower of a HELOC to understand that lenders calculate the variation between the prime rate and the interest rate (also known as the margin) differently.
No matter what it is called, the lending industry views a HELOC as a second mortgage. Due to the fact that about a decade ago the interest paid on a HELOC was deductible under both federal and some state laws, they became very common. HELOCs are also appealing because they offer flexible borrowing and repayment plans.
A debtor can make any size payment provided that it is less than the total amount and at least the minimum obligation, which is usually evaluated on the basis of the rate of interest. Funds from a HELOC loan can be withdrawn during what is known as the “draw period,” which is usually between 5-25 years. Final repayment of the loan happens when the total of the loan plus the interest has been paid back to the lender.
Traditional mortgages are normally a non-recourse loan, which means they’re secured by a pledge of collateral, which is the home itself, in the case of a home equity loan. Legal responsibility is a key variation between traditional loans and a HELOC as with a traditional loan the borrower is not personally liable but with a HELOC, that may not be the case. This distinction is extremely important when managing foreclosures since the borrower can be considered liable for a recourse debt on a foreclosed property.
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