Buddy at work was telling me about Home Equity Line Of Credit (HELOC) loans today. Said he paid of his house in 7 years. First I've ever heard of it. Started researching and am very intrigued. It makes sense that banks won't advertise this as they need our money to make money.

 

Has anyone tried this approach? What are the pitfalls? Seems way to good to be true.

I don't understand. Approach to what? What was your buddy using the line of credit for? Was he refinancing using a HELOC?

 

As far as the lenders are concerned, it's basically a second mortgage, except that instead of being advanced a large sum against your home up front, you're extended a line of credit that you may draw on as desired. You pay the full principal back in agreed payments due at the end of the draw period (which will be specified in the credit agreement) or a specified repayment period.

 

HELOC interest rates are variable, so that's a consideration you'll want to watch for.

 

Typically you can treat interest on a line like this in the same way as mortgage interest and it can be tax deductible, which is nice.

Whatever your buddy is telling you is too good to be true. :lol2: Getslow laid it out nicely, that's the reality of a HELOC.

Other HELOC options are open-ended and allow you to simply write checks on them and some even have debit/credit cards that come along with them so you just go to the store and make your purchases and it goes against your HELOC to build up the balance and increase the interest payment you make each month.

 

Remember that if you refinance the primary mortgage you'll be required to 0 out the HELOC which might make refi less attractive.

 

The fact that the interest can be tax deductible is a good reason to have a HELOC as your 1st loan you take out above whatever you may be paying on your mortgage.

I am not a financial guy at all but I know one thing, you cannot borrow your way out of debt.

I agree on all points. I believe if it was such a popular, not let's say hidden, option then the banks would have come out with the something better. There is always two sides to a story so that is why I'm asking around. Truly if this was as great as they make it sound then no one would ever sign up for a 30 year conventional loan, right? Some questions I need answered before I dive in

I agree on all points. I believe if it was such a popular, not let's say hidden, option then the banks would have come out with the something better. There is always two sides to a story so that is why I'm asking around. Truly if this was as great as they make it sound then no one would ever sign up for a 30 year conventional loan, right? Some questions I need answered before I dive in

You can't buy a house with a HELOC. You have to have equity in a home to borrow against to be able to do it and most of the time a significant amount to make it worth it.

You can't buy a house with a HELOC. You have to have equity in a home to borrow against to be able to do it and most of the time a significant amount to make it worth it.

 

Right. That's why I initially wondered if it was a re-financing, borrowing enough at one time in a HELOC to pay off the original home loan and replace it with this. If you pay it off in a short enough time and the interest rates hold steady, you could conceivably save some money vs. an adjustable rate mortgage.