What is a HELOC?

A Home Equity Line Of Credit (HELOC, pronounced he-lock) can be an excellent financing tool, if it is used properly. A HELOC is basically a credit card secured by a mortgage or deed of trust on your property. You only pay interest on the amounts you borrow on the HELOC. If you don't use the line of credit, you don't have any monthly payments to make. You can access the HELOC by writing checks provided by the lender. In most cases, it will be a second lien on your property.

If you need to borrow money to pay off debts or make a major purchase, a home equity line of credit (HELOC) can be useful. A HELOC is a form of revolving credit secured by the equity in your home. This is an open ended loan that can be paid down or charged up for the term of the loan, much like a credit card. The interest rate fluctuates (typically monthly).

With a HELOC, your lender will approve you for a specific amount of credit - the maximum amount you may borrow at any one time under the plan. In determining your credit limit, your income, debts, credit history and other financial obligations will be reviewed. In many cases an appraisal will not be required on your home, instead lenders use an auto-evaluation system to determine the home's market value. Your credit limit will be based on a percentage of your home's appraised value, which is then subtracted from the balance owed on your existing mortgage.

Most HELOCs have a fixed period (5, 10, even 20 years) during which you can borrow money. Typically, you will use special checks or a credit card to draw on your line. You will be required to make a minimum payment each month usually the interest that accrued during the draw period. However, the interest you pay is usually tax deductible. (consult your tax professional) At the end of your "draw period," you will be required to pay off the loan, making monthly payments on the principal and interest.

What is a Fixed Rate 2nd?

A Fixed Rate 2nd mortgate is just as it sounds. The rate on the 2nd mortgage is Fixed for a certain time period, usually 10, 15 or 20 years. The most popular is called a "30 due in 15 (or 30/15)". This 2nd loan is amortized over 30 years, but has a balloon payment in 15 years. This loan will offer the lowest monthly payment. Most borrowers do not worry about the future balloon payment as they have already made plans to refinance to consolidate their loans; or sell the house before the balloon payment comes due in 15 years.

These loans are usually for amounts of $150,000 or less and taken out because of the fear interest rates are rising. Consumers utilize this loan to payoff credit card debt, installment loans, and roll over their HELOCs (if they fear rates could move higher).