A home equity line of credit — often referred to as a HELOC — allows homeowners to borrow a certain amount of money based on their equity for the duration of the loan term. Simply put, it is a second mortgage that allows homeowners access to cash through a revolving line of credit.
Because it is a loan secured by your home, the interest rate is often lower than with other types of loans. This lower interest rate can help you save money, especially if you use the loan to consolidate debts with higher interest rates. To help you better understand what a HELOC is and its benefits, here are some answers to some commonly asked questions about HELOCs.
How is the interest rate on a HELOC calculated?
A HELOC is a variable-rate loan tied to the prime rate, which is the interest rate used by banks to determine pricing for financial products such as loans, mortgages and credit cards. When the Federal Reserve raises rates, the prime rate increases, too.
An individual’s home equity credit line interest rate is calculated the same way as other loans. It is the prime rate, plus the margin, which is determined by credit score.
What can I use a HELOC for?
Once you have a HELOC, your revolving line of credit is there for just about whatever you need it for. Use your home equity credit line for:
- Home improvements
- Debt consolidation
- Higher education
- Managing cash flow
- Vacation and travel
- Medical bills
- Financial emergencies
What is the difference between a HELOC and a home equity loan?
Are you wondering about the difference between a HELOC and a home equity loan, and why you might choose one over the other?
A home equity loan is a one-time, lump sum payment made to the homeowner. A home equity loan carries a fixed interest rate, allowing consumers to make payments in the same amount each month.
A home equity loan prohibits borrowers from borrowing further from their home, so these loans are generally better suited for consumers who plan to use the money for a purchase with a fixed price tag. Consider a traditional home equity loan if you have more than 20 percent equity and you’re planning a single, large project such as a new roof.
A home equity line of credit allows for flexibility in accessing the equity in your home over the life of the credit line. A HELOC is generally better for projects that will require access to funds over time.
Wondering which type of home equity loan is right for you? Speak to a Zions Bank representative today by calling 800-727-8893 or visit a local Zions Bank branch to learn more about your home equity loan options.
