mortagesandforeclosures

by Eric Tupaz

The home equity line of credit (HELOC) and the traditional home equity loan are two entirely different things. Their difference can save you thousands of dollars and even slash 13 years from your mortgage.

You probably would say there isnt much difference between a traditional credit card and an American Express Card since you think they serve the same purpose?

But there is one huge difference.

Traditional credit cards, such as a Visa or Master Card, have higher interest rates and creditors are only allowed to pay their monthly minimum balance. The American Express card conversely allows creditors to fully pay off their balances at the end of each month so that they will not be charged for outstanding balances 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 they appear to have the same purpose, all credit cards are not necessarily governed by the same rules. Not being able to plan your cash flow and not paying your American Express card credits can cause you much trouble.

The same applies to any HELOC and a home equity loan. Not knowing the difference could cost you thousands of dollars in extra interest payments. And one of them could help you slash at least 13 years off your mortgage if you would know how to use it.

So let us get started.

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.

And if the prime rate falls your HELOC interest-rate will fall as well. In some cases you can get a lower interest rate on your HELOC at a few points below prime rate depending on your financial situation.

Using a HELOC mortgage means your interest will be computed based on your current HELOC balance. So when you make contributions within a particular month, the interest will be computed per day. This is the interest that will be applied to your account.

This is called the variable method of calculating interest. The reason is that if your balance increases or decreases, the interest you pay is variable or changes daily.

This is enough to make you realize that making use of the method is completely to your advantage.

When you make use of the HELOC mortgage, you can pay your HELOC and borrow money from it any time. You only have to make sure that you will not go over you HELOC limit so you can go on using it to borrow money.

Although the traditional home equity loan is quite similar to the HELOC, there are two characteristics that establish the difference.

First, the home equity loan operates on a fixed time frame. You have to pay a fixed home equity loan interest per month and you will be paying a fixed interest rate. There are no fluctuations even when the prime interest rate changes. This mortgage will then be considered as a 30-year fixed loan account.

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.

If you require lump sum payments and you want to pay in small amounts monthly, then using the traditional home equity loan will be perfect for you. This will allow you to pay off your interest and at the same time allocate extras for your principal loan.

In all aspects, a traditional home equity loan is fixed. The interest-rate, the amount you borrow and the home equity loan payment term is fixed. You cannot change this and you're expected to repay this mortgage over the life of the loan.

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.

Both these strategies also have their own benefits and drawbacks.

Most people do not know that the HELOC can actually be used as a mortgage checking account.

This means you can actually 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.

And heres another undisclosed fact.

When you convert your HELOC into a checking account, you are actually taking 13 years off your primary mortgage and save thousands of dollars in the process plus achieve a mortgage reduction strategy faster. .

As a matter of fact, you can save up to $63,000 or more without having to change your lifestyle or shell out more cash and achieve a mortgage reduction strategy faster.

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 faster.

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