A Home Equity Line of Credit Assist Homeowners. . Mortgage Reduction 36 by Jeremy Acosta
The difference between a home equity line of credit HELOC a traditional home equity loan could save you thousands of dollars slash 13 years from your mortgage
You probably would say there isnt much difference between a traditional credit card an American Express Card since you think they serve the same purpose
What you do not know is that there is significant difference.
A traditional credit card such as a Visa or MasterCard charges you a high interest rate but you're allowed to pay only the minimum balance at the end of each month. With an American Express card on the other hand you have to pay the balance in full at the end of each month otherwise there will be huge charges for the outstanding balance interest.
The American Express card will cater to your purchasing needs for 30 days but you need to pay off your balance as soon as it due.
So even when they are both credit cards they actually have different functionalities. If you fail to plan your cash flow efficiently not paying off your American Express credits would most likely get you into trouble.
The same is true with any HELOC home equity loan account. When you do not know the difference between these two you might end up paying thousands of dollars in extra interest payments. If you knew how to use it you would actually be able to take 13 years off your mortgage balance.
Lets begin.
A HELOC mortgage is line of credit usually secured by your home. You can think of this as your second mortgage. The HELOC interest rate is usually a variable interest rate.
It adjusts according to the prhyme interest rate. So if the prhyme interest rate goes up generally speaking your HELOC interest rate will go up.
If the prhyme interest rate decreases the HELOC will do too. Under certain circumstances you will be able to get a lower interest rate for your HELOC. The rate will even be relatively lower than your prhyme rate. This largely depends on your financial situation.
When you use a HELOC mortgage interest is calculated based on the outstanding balance of your HELOC. So if you make payments during the month the interest will be calculated every single day is applied to your account.
This system of calculating interest is called the variable method simply because the amount of your interest could increase or decrease daily.
This is the advantage of calculating interest using the variable method.
You can pay off your HELOC borrow from it anytime as long as you dont exceed the HELOC limit.
Although the traditional home equity loan is quite similar to the HELOC there are two characteristics that establish the difference.
One home equity loan accounts are fixed. It operates on a specific period there are fixed interest rates the amount that you will be paying per month will be the same. Even if your prhyme interest goes down the rate that you will be paying will not change. This can be considered as a 30 year fixed loan plan.
Two you can only borrow funds from your equity loan if you have adequate equity in you home if you have refinanced your home equity loan. This only means that you cannot just borrow money from it any time.
Using the traditional home equity loan is only advisable if when you require lump sum payments are planning to make multiple payments per month. This way you will be able to pay back interest pay extra towards your principal balance at the same time.
In all aspects a traditional home equity loan is fixed. The interest rate the amount you borrow the home equity loan payment term is fixed. You cannot change this you're expected to repay this mortgage over the life of the loan.
The HELOC loan is variable. The interest rate as well as the amount you borrow can change over the repayment term of the loan.
Both these strategies also have their own benefits drawbacks.
The one significant advantage of the HELOC that no one talks about is that you can use it as a mortgage checking account.
This means you can actually consider your HELOC as something that is similar to your regular checking account. You can use it to pay your bills do online transactions every month as long as you deposit your paycheck into it.
Heres another secret that no one actually talks about.
When you convert your HELOC into a checking account you are actually taking 13 years off your primary mortgage save thousands of dollars in the process plus achieve a mortgage reduction strategy faster. .
In fact without changing your lifestyle or spending more you can save over $63,000.
Because the HELOC has a variable interest rate will grant you the ability to withdraw deposit money you can use this as an effective tool to repay your mortgage early achieving a mortgage reduction strategy faster.
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