HELOC is the abbreviation for a home equity line of credit. It is a loan set up where you receive a line of credit from the lender. The loan amount is based on the value of the home and you use your home as a collateral for the same. The amount of equity in your home will help you determine the amount of loan you are eligible for. Once you get the loan, you will receive a card or a check to the account and you can use the same to draw from the line of credit as and when you need to use it.

How does HELOC work?

HELOC is a loan that will consider your credit history and the value of your home before giving you a line of credit. There are different features of the loan you need to understand before you apply for one, they are:

• Even if you are approved for the line of credit, the monthly payment will depend on the amount drawn by you.
• This line of credit is very similar to that of a credit card, which means you will be obligated to pay back the amount used by you.
• You get checks or a card linked to the loan account and you can use them to pay for whatever you need.
• When you pay an interest on HELOC, you can claim a deduction for the same from the tax.

How should you apply for a HELOC?

Whenever you decide to apply for HELOC, you need to consider a plan that is an ideal fit for your needs. You will have to understand the terms of the loan, the repayment terms, and the interest associated with the same. You need to consider the annual interest and the cost of taking the loan. A lot of lenders do not include any fees in HELOC and the annual percentage rate (APR) is totally dependent on the interest rate. You also need to compare different loan types with HELOC in order to find the one that is the best for you. Opt for a lender who gives you low interest rates.

HELOC vs. home equity loan

Many are not aware of the difference between a home equity loan and a HELOC. Before you make an application to borrow, you need to understand the difference as well as the similarity between the two. A home equity loan is an installment loan like a car loan where you borrow money and then make regular payments over the tenure. You know how long you will be paying your money and the amount of outstanding debt. You will be locked in a monthly payment system in a home equity loan. In the case of HELOC, you pay as you use. The interest rate in both the cases will depend on the credit score and the equity you have in the home. Both the loans are tax deductible and if you default in either of the two, you lose your house to foreclosure. This is why it is important to read the fine print before signing the loan documents.

A HELOC offers excellent interest rates, which are much lower than that of a credit card. Hence, evaluate your options and consider the purpose of borrowing before you apply for a loan. Do your homework and ensure that you are making the right borrowing decision on your home.