What is a HELOC?

Originally posted 2008-12-02 08:03:42. Republished by Blog Post Promoter

Before we discover why the home equity loan must be an adjusted rate loan and discover more about how the money merge account can make us financial free. I felt it was necessary to address several responses and comments about the money merge account.

There has been a lot of response to my recent blog on the money merge account.  It has been brought to my attention that the HELOC (home equity loan) is being blocked or they are hard to come by, so I thought that it was necessary to reveal what company is still offering the HELOC.  The company is US Bank. 

                The features of the HELOC that is being offered by US Bank is 15 year draw period with a a 10 year repayment period.  The money in the HELOC can be assessed using a Visa card and/or checks.  There is no minimum or maximum charge and no limits on number of checks.  The states that this HELOC is currently available in are:

• California
• Colorado
• Oregon
• Utah
• Idaho
• North Dakota
• Missouri
• New Mexico
• Wyoming

US Bank promises to add more states, soon.  Please visit www.ulstfinancial.net/financialfreedomin2008, and continue to check to see when your state is added to this unique and needed program.  Please contact me at taylorbrownrealestate@yahoo.com to find out the guidelines used to qualify for US Bank’s HELOC.

                Now that everyone knows where they can get their HELOC let’s discuss the requirement of the HELOC.  The HELOC must be open ended, must have an interest only payment option, and needs to have a variable interest rate.

                The fixed interest rate cause the HELOC to function as a closed end loan. 

                Before we go any further, I think it would be necessary to discuss once again the difference between an open end loan and a closed end loan.

The closed end loan is driven by an amortization schedule.  This amortization schedule does not move at the speed of light.  It moves the opposite slower than a snail.  Hence, taking 30 years to pay it down.  Before we go any further, I feel you need to understand what an amortization schedule is.  It is the blending of loan payments showing the principal and the amount of interest that you are paying each time you made your scheduled payment.  Why, you ask?  Let examine.  If your mortgage payment was $2,000.00 a month.  You will pay only $199.10 to principal and a whopping $1,800.90 to interest in your first month.  The second month, the amount to principal will increase by only one additional dollar, so for every month that follows there is only one more dollar applied to the previous months principal payment.  That’s right one dollar.  For instance, month two the principal payment is 200.10, month 3 $201.10, month 4 202.10, etc.

A closed end loan is a loan that has limitations because the money paid in cannot be withdrawn.  Meaning that once the money is received by the lender it is paid on the balance owed and equated into an equity position in your home.  Equity is the different between what you owe and how much the property is worth.  The lender will apply a full scheduled payment.  If you desire to pay toward your principal you must specify that the money needs to be applied to the principal.  Oh, by the way, you must be current on your mortgage to be able to pay on your principal balance.  Remember, the lender is in the business to make money so if you do not instruct the lender, where to apply the extra payment they will apply the additional money to, you guessed it, interest, because that is how lender makes money.  Interest, of course, is the rent that you are paying the lender to borrow their money to get your home.

Another interesting thing about a closed end loan is the interest charges are from the principal balance at the end of the month.  In other words, the interest paid is for the next month not the month that the bill is due.  The interest is a pre-determine amount.  Meaning it is calculated daily but applied to the month end principal balance.  Now, this does not effect daily interest in the month the payment is receive, but effect the following month pre-determine amount.

                The open end loan is a loan where the lender must apply your payment to the loan balance on the day received. Remember, with our mortgage, the closed end loan, the payment is applied, but it does not effect the mortgage in the month or day received, but it effects the following months principal balance and calculated interest.

If there is a payment several times a month on the open end loan the lender will have to recalculate interest several times in the month. Consequently, the interest can be reduced daily (if we send in a payment daily) or several times a month at the most depending on frequency of payments.  This in turn forces the lender to recalculate interest and subsequently canceling interest charged on the mortgage.  Incidentally, this loan uses daily interest cancellation on the new principal balance once the payment is applied.

                This type of account has another advantage you can take money out and put money in.  This feature is similar to your checking account.  With that being said we are going to examine using the advanced line of credit as a checking account.  We will examine applying our income to the advanced line of credit and paying our bills from the account.  When we apply our income to the advanced line of credit, we are making a payment on the advanced line of credit.  When we pay our bills from the advanced line of credit we are withdrawing from the account.

                Next time, we will get into the meat and potatoes of the money merge account, and how it will help make us financial free.