What Does HELOC Mean?

There are some home equity lines of credit that are recognized as HELOCs. Different than more traditional home equity loans, with a HELOC not all of the money is given to the borrower. Once the credit limit has been determined, the borrower can use the HELOC as a credit card, taking out any desired sum provided that it does not go over the total balance of the loan.

Typically home equity loans are not used for everyday bills and are kept, unlike a credit card, for more significant situations, for example unforeseen medical expenses, college and home renovations. Specifically, a home equity line of credit is a loan in which the financial institution agrees to lend a maximum amount within an agreed period (called a term), where the borrower's equity in his/her house becomes the collateral for the line of credit.

One main variation between a HELOC and an ordinary loan is the fact that with a HELOC the interest charge is variable. Because of the fact that the determining factor in fomulating the rate of interest is the prime rate index, it is imminent that the rate will fluctuate periodically. No two lenders calculate the margin of a home equity loan the same, so this means that rates will vary significantly from lender to lender.

People in the lending industry consider a HELOC to be the same as a second mortgage. HELOCs were quite popular a decade ago partly because in some circumstances, interest payments were deductible under federal and some state laws. Flexible borrowing and repayment plans are also factors in the HELOC's rising attractivness.

A borrower can make any size payment as long as it is less than the total amount and at least the minimum obligation, which is usually evaluated on the basis of the rate of interest. Funds from a HELOC loan can be withdrawn during what is known as the "draw period', which is usually between 5-25 years. Repayment consists of the total taken out plus interest.

Conventional mortgages are normally a non-recourse loan, which means they're secured by a promise of collateral, which is the home itself, in the case of a home equity loan. Liability is a key difference between traditional loans and a HELOC as with a traditional loan the borrower is not personally liable but with a HELOC, that may not be the case. A recourse debt in the case of a foreclosure proceeding can force a borrower to be personally liable.

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