Home Equity Credit Lines

Why Home Equity Lines of Credit Are More Popular Than Ever with Homeowners

A home equity line of credit (HELOC) is one of two types of second mortgage loans secured by the equity in your home. The other is the home equity installment loan. But, the home equity line of credit is becoming more popular than ever for several reasons, For example, a HELOC:

Important Benefits of Home Equity Line of Credit

• Offers additional financial security with a home equity line of credit that works exactly like a credit card. It's a revolving line that allows borrowers to draw repeatedly up to the loan balance.
• Has competitive low interest rates and check writing access to funds.
• Offers stated income and full-doc options, as well as a home equity rate lock feature,
• Requires no advance required at closing.
• Offers tax deductibility benefits because home equity interest is tax deductible.

In addition to the above-listed benefits, 100% cash out financing is available, and repayment terms are flexible. For the first few years of the loan (the draw period), borrowers have the options of making interest-only payments, which helps keep these loans affordable. There is also a lot of flexibility in what you are allowed to use the money for. For example, HELOCs help borrowers get cash for the down-payment of vacation homes, pay for college and medical expenses, consolidate debts and for home improvements.

The flexibility of being able to draw repeatedly from the line is what makes the HELOC so popular for on-going home improvement projects. "It's so flexible," says Kellon Tippett, vice president at BB&T Corp.'s direct retail lending division. "You can pay those costs as they come up without having to go back and reapply, so it's relatively cheap for the borrower."

While home equity lines are variable-rate loans, with interest rates tied to a publicly-available index and a fixed lender-specific margin, there are many plans that offer the option of converting the HELOC into a fixed-rate home equity loan. Be sure to look for this flexible option when shopping for your 2nd mortgage line of credit. Also try to get a credit line that has no application fee, usage fees or account maintenance fees because these fees can make your HELOC expensive to maintain.

The other thing to look for is whether or not your home equity line of credit plan has early termination fees. Early termination fees are best described as the HELOC version of a prepayment penalty—if you pay off and close the line early, you could be subject to penalties that could equal the closing costs the lender waived when you initially got the credit line.