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 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 credit cards seem to be just credit cards, they in fact serve two different purposes. If you do not plot your cash flow, you could be in distress if you don’t make payments on your American Express card.
The same is right 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 really be able to take 13 years off your mortgage balance.
Lets start.
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.
So if your prime interest rate falls, you will get decreased HELOC interest rates as well. Depending on your present financial status, you will even be entitled to delight in lower interest rates for HELOC which will be a few points lower than your prime rate.
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 system of calculating interest is called the variable method simply because the amount of your interest could increase or decrease 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. But, 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. Reckon 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.
Using the traditional home equity loan is only advisable if and when you require lump sum payments and are plotting to make multiple payments per month. This way you will be able to pay back interest and pay extra towards your principal balance at the same time.
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.
Most people do not know that the HELOC can really be used as a mortgage checking account.
This means you can really 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.
Heres another secret that no one really talks about.
When you convert your HELOC into a checking account, you are really taking 13 years off your primary mortgage and save thousands of dollars in the process plus achieve a mortgage reduction strategy quicker. .
In fact without changing your lifestyle or spending more you can save over $63,000.
Because the HELOC has a variable interest rate and will grant you the ability to withdraw and deposit money, you can use this as an effective tool to repay your mortgage early and achieving a mortgage reduction strategy quicker.