Home equity line of credit (HELOC)
Home Equity Line of Credit, otherwise abbreviated as HELOC, refers to the amount of money that is made available through a loan. This is specifically determined by the borrower’s home equity. To compute for home equity, one simply has to subtract the mortgage balance from the total value of the property. If there are liens on the property, it is also important to note this in order to arrive at an accurate value.
It is possible for a borrower to avail of a home equity loan if he so wishes. While it is true that both are dependent on the borrower’s home equity and therefore place the property as collateral, it is important to distinguish between a home equity loan and a HELOC. The former allows the borrower to take the entire approved amount at one time. On the other hand, the latter, as its name suggests, is a line of credit. The borrower is secure with the knowledge that he has available funds but may or may not decide to use the entire amount.
For some borrowers, an arrangement in which they do not hold all of the money at one time may be best for practical budgeting purposes. Many people are more likely to make rash spending decisions when they have the money in their hands than when they have time to think about the necessity of the expense. At the same time, people who have availed of a HELOC can usually deduct the interest from their annual tax returns.