A home equity line of credit (often called HELOC , pronounced Hee-lock) is a loan in which the lender agrees to lend the maximum amount within an agreed period of time (termed) where the collateral is the equity of the borrower in his house (similar to the second mortgage). Since homes are often the most valuable asset of consumers, many homeowners use home equity loans only for key items, such as education, home improvement, or medical bills, and choose not to use them for day-to-day expenses. HELOC harassment is often cited as one of the causes of the subprime mortgage crisis.
Video Home equity line of credit
Differences from conventional loans
A HELOC is different from a conventional home equity loan in which the borrower does not propose the entire amount in advance, but uses the line of credit to borrow a total sum not more than a credit line, similar to a credit card. HELOC funds may be borrowed during the "draw period" (usually 5 to 25 years). The repayment is the amount withdrawn plus interest. A HELOC may have a minimum monthly payment requirement (often "interest only"); however, the debtor may pay any amount as long as it is greater than the minimum payment (but less than the amount owed). The full principal amount matures at the end of the draw period, either as a lump-sum balloon payment or in accordance with the loan amortization schedule.
Another important difference from conventional home equity loans is that the interest rates on HELOC vary. Interest rates are generally based on indexes, such as prime rates. This means that the interest rate may change over time. Homeowners who shop for HELOC should be aware that not all lenders calculate margin in the same way. Margin is the difference between the main interest rate and the interest rate that will actually be paid by the borrower.
HELOC loans became very popular in the United States in the early 2000s, in part because interest paid was usually deducted under many state and federal income tax laws. This effectively reduces the cost of loan funds and offers attractive tax incentives over traditional lending methods such as credit cards. Another reason for HELOC's popularity is their flexibility, both in terms of borrowing and repaying according to the schedule specified by the borrower. Moreover, the popularity of the HELOC loan may also come from their better image than the "second mortgage", a term that can more directly imply an undesirable level of debt. However, in the lending industry itself, HELOC is categorized as a second mortgage.
Since the underlying guarantee of the home equity line of credit is home, failure to repay the loan or meet the loan terms may result in foreclosure. As a result, lenders generally require that borrowers maintain a certain level of equity at home as a condition of providing a home equity line.
Maps Home equity line of credit
HELOC freeze
In 2008 major home equity lenders including Bank of America, State Treasury, Citigroup, JP Morgan Chase, Mortgage City National, Washington Mutual and Wells Fargo began letting borrowers know that their home equity line of credit has been frozen, reduced, suspended, revoked or restricted. in another way. Falling housing prices have caused the borrower to have reduced equity, which is considered an increased risk of foreclosure in the eyes of the lender. On January 27, 2010, a federal judge refused to cancel a class action suit against Chase to freeze HELOC's loan. The court has stated that banks may freeze HELOC in cases where the value of homes decreases substantially, which is considered by the court as a 50% decrease in value.
See also
- FICO Scores
- Loans to rate
References
External links
- The Federal Reserve website offers information on HELOC loans
Source of the article : Wikipedia
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