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Daily Mortgage Rates and News

Home Equity Line or Line of Credit

A HELOC, or Home Equity Line of Credit, is the right to borrow money from a lender up to a certain amount of money. The “line” is a credit line guaranteed by your house, meaning that if you can’t live up to the terms of the line, then the lender has a right (after a few nasty letters) to foreclose on your house. Typically HELOCs (pronounced HEE-lock) have floating interest rates that can change periodically.

For example, a borrower might obtain a $75,000 HELOC at “prime plus one.” This means that the interest rate is one percentage point higher than the Prime Rate. If Prime is 5.5%, then the HELOC is 6.5%. Remember: The rate is tied to the Prime and could change as much as at every billing date. (The change can be dramatic; e.g., in April of 2007, the Prime Rate was 8.25 percent, whereas in June of 2003, it was 4.25 percent.) Many HELOCs today have a fixed rate feature sometimes called a “Fixed Rate Partition” that allows the borrower to lock a portion of the loan amount at a fixed rate for a period of time. This feature varies greatly between different lenders.

Who should get one: Someone who might need extra cash for home improvements, or is looking at borrowing money to buy a different house (in addition to a mortgage).

Who shouldn’t: Do not use a HELOC to splurge for things like vacations or to finance other consumer debts, like credit card purchases (unless you then plan to tear those cards up!). HELOCs are guaranteed by your house, which means the stakes are very high.

Home Equity Loans are when a lender gives you a set amount of money and you pay it back over a fixed payment schedule. Typically these loans have fixed interest rates. This is a better option for someone who wants to lock in a fixed interest rate, either because they think interest rates are going to increase or because they like the certainty of knowing what their payment schedule will be.

A home equity loan also is a better option than a home equity line if you know exactly how much money you need to borrow and when you want to borrow it.

How to get one: You can get a home equity loan or line either from a mortgage broker or from a bank directly. These loans are also called “second mortgages” because they are typically obtained after the home has been purchased with a first mortgage loan. For more information please visit our website.