ANSWERS: 1
  • A home equity line of credit, or HELOC, is a type of loan that taps in to the equity of a home as collateral for the money borrowed; a HELOC can be an effective way to gain access to a large loan quickly but it may be financially dangerous.

    Function

    A HELOC is essentially the same as second mortgage or home equity loan since involves a lender giving money in exchange for equity; the main difference is that HELOCs allow borrowing up to a certain limit on demand rather than giving a one-time lump sum.

    Benefits

    A HELOC can be a useful way to gain access to a large amount of capital quickly for costs such as health care and education; interest owed on a HELOC may also be tax deductible.

    Drawbacks

    A HELOC trades away equity for cash and interest is charged on borrowed money like any other loan that can reduce wealth over time and potentially cause foreclosure if the loan is not repaid.

    Time Frame

    HELOCs typically have a predetermined withdrawal period such as five or 10 years during which time equity can be exchanged for credit; after the draw period ends, the HELOC may be able to be renewed.

    Considerations

    A normal home equity loan can be a safer option than a HELOC because the amount borrowed, the interest owed and time to pay back the loan are often variable with a HELOC but fixed with a home equity loan.

    Source:

    Federal Reserve: HELOCs

    Federal Credit Union: What You Should Know About HELOCs

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