Home equity lines of credit, or Heloc's, have always been a popular way to access a home's equity and put that cash to use, whether to remodel and renovate the home, pay off other debts, or even put a child through college. But how do they work? A Heloc is basically a low interest credit card, a line of credit that acts like a second mortgage on your home. Like a credit card, normally a Heloc only requires that you pay towards interest every month, but normally has a lifespan of only 10 years. Heloc's work like a credit card as well in that you can pay the Heloc down, and then re-borrow that money again and again. Sounds great doesn't it?! But be careful, Heloc's have their downside as well.
Heloc rates are tied to the prime rate, controlled by the Federal Reserve Board. As we have seen many times in the last year, the Fed will often raise rates to stimulate the economy or slowdown inflation. Everytime they do so, your Heloc rate has the potential to raise as well, thus making your monthly payment on the Heloc rise accordingly. Thus, the one big caveat to Heloc loans is that they can adjust on you frequently, and with little warning, potentially making your payments more than you can afford each month.
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