The difference between a home equity line of credit(HELOC) and a traditional home equity loan could save you thousands of dollars and slash 13 years from your mortgage
Do you know the difference between a traditional credit card and an American Express card? At first glance they both appear to be credit cards.
What you do not know is that there is a 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 and interest.
The American Express card therefore provides you with funds for the purchases that you will be making for 30 days but you also have to be responsible enough to settle your accounts when it is 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 applies to any HELOC and a home equity loan. Not knowing the difference could cost you thousands of dollars in extra interest payments. And one of them could help you slash at least 13 years off your mortgage if you would know how to use it.
Lets start.
You can secure a HELOC mortgage line of credit by means of your home. You can take this as another mortgage. HELOC is known to have a variable interest rate.
This means that the interest rate adjusts to the prime interest rate. Thus, if the latter increases, HELOC interest rates will also increase.
If the prime 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 prime rate. This largely depends on your financial situation.
Using a HELOC mortgage means your interest will be computed based on your current HELOC balance. So when you make contributions within a particular month, the interest will be computed per day. This is the interest that will be 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.
With the HELOC mortgage you can always pay down the HELOC and borrow from it any time. As long as you don’t exceed your HELOC limit, you can generally use it to keep borrowing money.
It is true that HELOC is almost the same as the traditional home equity loan. There, however, are two main points that distinguishes one from the other.
First, the home equity loan operates on a fixed time frame. You have to pay a fixed home equity loan interest per month and you will be paying a fixed interest rate. There are no fluctuations even when the prime interest rate changes. This mortgage will then be considered as a 30-year fixed loan account.
Two, you can only borrow funds from your equity loan if you have adequate equity in you home and if you have refinanced your home equity loan. This only means that you cannot just borrow money from it any time.
If you require lump sum payments and you want to pay in small amounts monthly, then using the traditional home equity loan will be perfect for you. This will allow you to pay off your interest and at the same time allocate extras for your principal loan.
All in all, the traditional home equity loan is permanent and does not change. The interest rate, the amount of your loan, and the home equity loan payment stays the same and you are supposed to be paying your dues throughout your loan period.
The HELOC loan, on the other hand, opens up the possibility of you paying for lower interest rates. The principal amount borrowed may even change over the repayment term of your loan.
Each has its own significant advantages and disadvantages.
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 and do online transactions every month as long as you deposit your paycheck into it.
And heres one more thing that other people do not tell you.
Your HELOC used as a checking account would get you savings worth thousands of dollars and would can help you slash 13 years off your mortgage balance and achieve a mortgage reduction strategy faster.
In fact, you will be able to get $63,000 worth of savings without spending more or changing your financial lifestyle.
Because interest rates is variable and you have the freedom to borrow and remit money anytime, the home equity line of credit is one great method of paying off your mortgage early achieving a mortgage reduction strategy faster.
Related posts:
- Do You Really Need A Home Equity Line Of Credit?
- How Do I Decide Between a Home Equity Loan and Home Equity Line of Credit
- How Does A Home Equity Line Of Credit Work?
- A Home Equity Line of Credit Assist Homeowners..Mortgage Reduction 6
- Mortgage Reduction Using A Equity Line of Credit Secret To A Debt Free Lifestyle 44
