The home equity line of credit (HELOC) and the traditional home equity loan are two entirely different things. Their difference can save you thousands of dollars and even 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 will cater to your purchasing needs for 30 days but you need to pay off your balance as soon as it is due.
So while they appear to have the same purpose, all credit cards are not necessarily governed by the same rules. Not being able to plan your cash flow and not paying your American Express card credits can cause you much trouble.
The same is true with any HELOC and home equity loan account. When you do not know the difference between these two, you might end up paying thousands of dollars in extra interest payments. If you knew how to use it, you would actually be able to take 13 years off your mortgage balance.
So let us get started.
HELOC interest rates are variable. This line of credit can be secured through your home and you can consider this as your second mortgage.
It adjusts according to the prime interest rate. So if the prime interest rate goes up generally speaking your HELOC interest-rate will go up.
And if the prime rate falls your HELOC interest-rate will fall as well. In some cases you can get a lower interest rate on your HELOC at a few points below prime rate depending on your financial situation.
Your outstanding HELOC balance will serve as basis for calculating your HELOC mortgage interest rate. So your interest rate will be computed per day if you make multiple remittances within the month. The result of the computation will be the interest rate that will be applied to your mortgage account.
This is called the variable method of calculating interest. The reason is that if your balance increases or decreases, the interest you pay is variable or changes daily.
This makes the variable method completely helpful.
You can pay off your HELOC and borrow from it anytime as long as you dont exceed the HELOC limit.
Although the traditional home equity loan is quite similar to the HELOC, there are two characteristics that establish the difference.
One, home equity loan accounts are fixed. It operates on a specific period, there are fixed interest rates, and the amount that you will be paying per month will be the same. Even if your prime interest goes down, the rate that you will be paying will not change. This can be considered as a 30-year fixed loan plan.
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.
The perfect time to use the traditional home equity loan is when you require lump sum payments up front and you plan to make small payments every single month. You can pay back both interest and pay extra towards principal.
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.
Both these strategies also have their own benefits and drawbacks.
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.
When you convert your HELOC into a checking account, you are actually taking 13 years off your primary mortgage and save thousands of dollars in the process plus 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 will vary and you will be able to withdraw and deposit money anytime, the HELOC is certainly one effective strategy that you can use in order to pay off your mortgage early and achieving a mortgage reduction strategy faster.
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