A\u00a0home equity line of credit\u00a0also refereed as HELOC\u00a0and pronounced HELL-ock\u00a0 is a\u00a0loan\u00a0in which the lender is ready to provide a maximum amount of loan within a fixed period (called a term), where the\u00a0collateral\u00a0is the borrower’s\u00a0equity\u00a0in his\/her house (similar to a\u00a0second mortgage).<\/p>\n
Since a home is regarded by consumers as most valuable asset, many homeowners make use of home equity credit lines only for important items, such as education, home enhancement, or medical bills, on other words, borrowers choose not to use them for day-to-day expenses.<\/p>\n
HELOC misuse is often mentioned as one of the biggest causes of the\u00a0subprime mortgage crisis.<\/p>\n
How Is It Different From Conventional Loans<\/p>\n
The difference between a HELOC and conventional\u00a0home equity loan is that in former case\u00a0 the borrower is not sanctioned the entire sum up front, but he\/she uses a\u00a0line of credit\u00a0to borrow sums that cannot cross the\u00a0credit limit, just like a\u00a0credit card. The borrowers under HELOC funds are eligible for the funds during the “draw period” (typically 5 to 25 years). Repayment amount is the total of the amount drawn plus interest. A HELOC may carry a certain monthly minimum payment requirement (often “interest only”); though, the debtor is allowed to make a repayment of any amount provided that it is greater than the minimum payment (but smaller than the total outstanding). The entire principal amount is payable at the end of the draw period. The payment can be done either as a lump-sum\u00a0balloon payment\u00a0or according to a\u00a0loan amortization schedule.<\/p>\n
Another significant difference from a conventional loan is that the interest rate on a HELOC is not fixed. The interest rate is , in general, based on an index, for example\u00a0 the\u00a0prime rate. This implies that the interest rate is likely to vary over time. Homeowners planning for a HELOC must be conscious that not all lenders calculate the\u00a0margin\u00a0the same way. The margin amount is the difference between the prime rate and the interest rate the borrower will actually pay up front.<\/p>\n
In the United Stes, HELOC loans became immensely popular in the early 2000s, mainly because interest paid was (and is) normally (depending on specific circumstances) deductible under federal and many state income tax laws.<\/p>\n
This in turn, lowered the cost of borrowing funds and provided an attractive tax incentive over traditional methods of borrowing (for instance: credit card debt). One more reason why the demand for HELOC loans soared was its flexibility, both in terms of borrowing and repaying on a time duration determined by the borrower. In addition, preference for HELOC loans\u2019 also stem from their having a better image than a \u201csecond mortgage,\u201d a term which can more directly mean an undesirable level of debt. \u00a0Nonetheless, within the lending industry, a HELOC is classified as a second mortgage.<\/p>\n
As the underlying\u00a0collateral\u00a0of a home equity line of credit is the\u00a0home, failure to pay back the loan or meet loan obligations may result in\u00a0foreclosure. Accordingly, lenders normally ask the borrower to keep a certain level of equity in the home as a clause of providing a home equity line.<\/p>\n
HELOC Freeze (2008)<\/p>\n
In 2008, United States\u2019\u00a0 foremost home equity lenders such as\u00a0Bank of America,\u00a0Countrywide Financial,\u00a0Citigroup,\u00a0JP Morgan Chase,\u00a0National City Mortgage,\u00a0Washington Mutual\u00a0and\u00a0Wells Fargo started informing borrowers that their home equity lines of credit had been frozen, lowered, suspended, overturned or limited in some other manner.<\/p>\n
Plunging housing prices have resulted in borrowers possessing lowered equity, which is perceived as an increased risk of foreclosure in the eyes of lenders. In January 27, 2010 a federal judge declined to dismiss class action proceedings against Chase for freezing HELOC loans.<\/p>\n
Courts have maintained that a bank may freeze a HELOC in those circumstances where a home’s value decreases significantly, which is considered by courts as a 50% reduction in value.<\/p>\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
A\u00a0home equity line of credit\u00a0also refereed as HELOC\u00a0and pronounced HELL-ock\u00a0 is a\u00a0loan\u00a0in which the lender is ready to provide a […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[102,106],"tags":[],"class_list":["post-1174","post","type-post","status-publish","format-standard","hentry","category-finance","category-personal-finance"],"_links":{"self":[{"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/posts\/1174","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/comments?post=1174"}],"version-history":[{"count":0,"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/posts\/1174\/revisions"}],"wp:attachment":[{"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/media?parent=1174"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/categories?post=1174"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www2.stockmarketwatch.com\/learn\/wp-json\/wp\/v2\/tags?post=1174"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}