Deciding on the HELOC Loan

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One of the great things about home ownership, even if you are still paying off a mortgage, is that you can tap into the equity of your home if you need to. The equity is the difference between what you owe on the mortgage and what the house is worth. The home owner who has been paying off their mortgage for a dozen years or so and still with a dozen to go is in a far more 'equitable' position than the new home owner, though not as enviable as the one with the last payment check sitting on the side table waiting to be mailed!
Even in recent years with the GFC and the sub-prime shemozzle, established homes in good areas with solid mortgages and sensible owners are still enjoying the benefits of home ownership which includes HELOC availability. For those who are dying to know, a HELOC is a Home Equity Line Of Credit. A bit like a credit card tied to your mortgage. Here's how they work.

You organize a HELOC with your lender and they grant you a lie of credit based on your mortgage, home valuation and ability to repay and so on. All the usual stuff but keep in mind you have been with them for several years and they have a paper trail a blind man could trip over, so you are pretty much a shoe in for the HELOC. You need money to send your eldest to college and that means ongoing expenses. You can tap into the HELOC as and when you need it. When you don't need it, you pay back into the mortgage and top up the HELOC.

What is so much better than getting a credit card to achieve this, or even a personal loan, is the interest rate. For the sake of round figures you arrange a HELOC for $10,000. If you had a MasterCard or VISA with that kind of limit you would be looking at around $1800 per year in interest. If you took out a PL (personal loan), that is halved to about $900 a year but with a HELOC you are looking at, on average at current rates, only $576 per year in interest. No need to beat you over the head with those numbers again, is there?
Of course, there is a potential for getting into trouble and you need to be aware of the trips and traps waiting for you. First of all, don't get the HELOC to bale out your business. If that is going down the tubes, keep the family home as far away from the debtor's ledger as you possibly can. Tapping into the home equity to shore up a business that might be failing through no fault of your own but merely the current economic climate is not smart. While if you need billions and trillions like GM or Bear Sterns you can ask 'Ole Uncle Sam for a handout, the reality for Mr and Mrs Middle America is you're on your own, buddy.

The temptation is to tap into that home equity and tap hard, get the business back on its feet and then repay the HELOC. The best laid plans of mice, men and mortgagors often go astray and the bottom line is you could lose your home.

Like any line of credit, use it wisely and more so when you remember it is tied up to the biggest asset most of us have, the roof over our kid's heads. It can be a life saver and it can maintain the lifestyle we have come to expect but it can also be the straw that breaks the camel's back and sends us all to living in our car for the foreseeable future.
HELOCs are a tool, the same as any other financial product. They can't make a bad situation right all by themselves but they can make a borderline one worse.

Grant A. Baker is a lending consultant who has been associated with Bad Credit Loans [http://nontradloans.com] and Personal Loans for over 5 years in the finance industry. He has written over 20 books on personal finance with a specialty in bad credit personal loans [http://nontradloans.com]. He has a blog dedicated to personal loans and finance which can be read at NonTradLoans.com.
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