The significant distinction between a home equity line of credit (HELOC) and a traditional home equity loan allows every American citizen to slash off 13 years from their mortgage balance and save you thousands of dollars.
In essence, the traditional credit card and an American Express credit card are seen to be almost the same ” they ARE credit cards. How exactly are they different from each other?
What you do not know is that there is a significant difference.
A Visa or a MasterCard charges high interest rates and you will only be allowed to pay for the minimum balance every month. In contrast, the American Express card imposes extra charges when the creditor is unable to pay their accounts in full at the end of each month.
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 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.
This concept also applies is the same with your HELOC and your home equity loan account. If you dont know the difference between the two, you might find yourself spending a lot on interest when you could have actually slashed 13 years off your mortgage account if you knew how to use it.
Lets begin.
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.
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 is the characteristic of the variable method of calculating interest. It is called as such because the interest that you will be paying will change daily.
This is enough to make you realize that making use of the method is completely to your advantage.
You can pay off your HELOC and borrow from it anytime as long as you dont exceed the HELOC limit.
A traditional home equity loan, on the other hand, seems very similar. However, there are two differences.
The first difference is that the home equity loan is for a specified fixed period. The interest on the home equity loan is fixed each month and you would pay interest based on the fixed-rate. This rate does not fluctuate with the prime interest rate mortgage. Think of this as a 30-year fixed loan.
The second difference with is once you borrow against it, you cannot borrow from the equity loan at any time. In order to draw funds from this equity loan you have to have sufficient equity in your home and refinance your home equity loan.
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 indicates that HELOC works exactly like your regular checking account. You can deposit your pay check into it and use it to pay bills and even make electronic transactions every month.
Heres another secret that no one actually talks about.
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 without changing your lifestyle or spending more you can save over $63,000.
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 26
- A Home Equity Line of Credit Assist Homeowners..Mortgage Reduction 6
