mortagesandforeclosures

by Eric Tupaz

The significant distinction between a home equity line of credit (HELOC) and a traditional home equity loan allows every American citizen to slash off 13 years from their mortgage balance and save you thousands of dollars.

In essence, the traditional credit card and an American Express credit card are seen to be almost the same " they ARE credit cards. How exactly are they different from each other?

The difference is actually quite significant.

A Visa or a MasterCard charges high interest rates and you will only be allowed to pay for the minimum balance every month. In contrast, the American Express card imposes extra charges when the creditor is unable to pay their accounts in full at the end of each month.

The purpose of the American Express card is to allow you to fund your purchases for 30 days but settle your balance immediately when it is due.

So even when they are both credit cards, they actually have different functionalities. If you fail to plan your cash flow efficiently, not paying off your American Express credits would most likely get you into trouble.

The same is true with any HELOC and home equity loan account. When you do not know the difference between these two, you might end up paying thousands of dollars in extra interest payments. If you knew how to use it, you would actually be able to take 13 years off your mortgage balance.

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.

This means that the interest rate adjusts to the prime interest rate. Thus, if the latter increases, HELOC interest rates will also increase.

If the prime interest rate decreases, the HELOC will do too. Under certain circumstances, you will be able to get a lower interest rate for your HELOC. The rate will even be relatively lower than your prime rate. This largely depends 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 the advantage of calculating interest using the variable method.

With the HELOC mortgage you can always pay down the HELOC and borrow from it any time. As long as you don't exceed your HELOC limit, you can generally use it to keep borrowing 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.

Second, you are not allowed to borrow from you equity loan any time. You may only do so by making sure that you have enough equity and refinancing your home equity loan account.

Using the traditional home equity loan is only advisable if and when you require lump sum payments and are planning to make multiple payments per month. This way you will be able to pay back interest and pay extra towards your principal balance at the same time.

All in all, the traditional home equity loan is permanent and does not change. The interest rate, the amount of your loan, and the home equity loan payment stays the same and you are supposed to be paying your dues throughout your loan period.

On the other hand, the amount you borrow and the interest rate that you are supposed to be paying may vary throughout the repayment of your loans term if you are on a HELOC loan.

Both these strategies also have their own benefits and drawbacks.

The one significant advantage of the HELOC that no one talks about is that you can use it as a mortgage checking account.

This indicates that HELOC works exactly like your regular checking account. You can deposit your pay check into it and use it to pay bills and even make electronic transactions every month.

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. .

In fact without changing your lifestyle or spending more you can save over $63,000.

Because interest rates will vary and you will be able to withdraw and deposit money anytime, the HELOC is certainly one effective strategy that you can use in order to pay off your mortgage early and achieving a mortgage reduction strategy faster.

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