Question:

How to compare home equity line of credit (HELOC) to other loans?

Answer:

If you compare home equity line of credit (HELOC) to other loan types, you will notice that a heloc resembles the usage of a credit card less the fact a home equity line is borrowed against your equity.

HELOCs vs Credit Cards

Especially if you are having an open-end HELOC, it will seem that you have a credit card with big time revolving credit on it. You are assigned limit on the home equity line much as you would with a credit card; you are paying interest on the used amount, and you should be allowed to prepay the principal without penalty. Also, you are not supposed to have large closing fees. Just have in mind, you are using your property as collateral, which does not happen with common credit cards.

Should you be required to pay high closing costs, or have a prepayment penalty, just don't bother - find another lender. With all those lenders fighting for you as a customer an affordable easy-to-get HELOC should not be difficult to shop around.

HELOC Risks

HELOCs are supposed to be so easy to get that you should think of them as dangerous loans. For example, if your house costs some $100,000 and you owe $80,000 on it, you could ask the lender for a home equity line of credit, and will often get one above your house's worth. Say, with a heloc you have some $40,000 free to use. If you use it up unwisely, and you become late on payments, will you be able to sell the house for $120,000 plus fees? Perhaps not.

So, just beware. When taking a home equity line of credit compared to other loans, it is easier and cheaper to get and hence a HELOC could get you more easily in trouble.

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