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HELOC
LOANS
(and
headlock loans)
HELOC stands for home
equity line of credit, and are convenient for funding occasional
needs, such as paying off credit cards, making home improvements,
or paying college tuition. Most HELOC loans are second mortgages
and the major disadvantage of the HELOC is its exposure to interest-rate
risk. All HELOC loans are adjustable-rate mortgages (ARMs), but
they are much riskier than standard ARMs as the rates are tied
to the prime rate.
The minimum payments
on a HELOC, at least in the early years of the loan, are interest
only, which helps reduce the strain on your monthly budget. In
contrast a home equity loan is a fixed-rate loan with amortized
payments that include both interest expense and principal repayment.
It is not wise to try
and compare the annual percentage rate on a HELOC loan with that
of a standard loan since they mean two different things. The APR
on a HELOC loan is the prime interest rate as reported in the Wall
Street Journal and does not reflect other costs such as points or
other upfront costs.
HELOC loans have a couple
of other advantages for those who are into buying and selling properties.
If you're looking for a second home and the seller says, "I
need $100,000 cash by next Tuesday" then your HELOC can provide
such quick cash. Another situation where a HELOC will be advantageous
is for a foreclosure auction. Payment in many states is required
at the end of the auction day.
Other areas where a
HELOC loan can be used are home remodeling, taking a vacation, consolidating
bills, buying a car, truck, boat or motor home. A HELOC loan can
also be used to pay for college tuition or other necessary educational
needs.
The interest on HELOC
loans may or may not be tax deductible so it's best to check with
a tax advisor on this one. When considering a HELOC loan is it best
to first consider the amount of risk you're willing to take. Will
you be able to sleep at night? Will you constantly worry about losing
your home? Remember, that you can't put a dollar figure on peace
of mind, so if a HELOC loan seems too risky for you, it probably
is.
On the flip side, if
you can tolerate some risk and in fact, willing to take
some calculated risks, a HELOC loan may be just up your
alley. If you ever find yourself using your account like
an ATM card, then it may be time to rethink your situation.
But if you need quick money for specific financial items
a home equity line of credit just may be what the financial
doctor ordered.
Fiction: HELOC loans have now been wrapped into something
that lenders are now calling Headlock loans. Once you get
so in debt by using your HELOC the lenders have gotten you
in a headlock in order to lend you more money in order to
get out from under your debt. This self-perpetuating cycle
is similar to the Fannie Chokehold and the Freddie Stranglehold.
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