Home Equity Line of Credit (HELOC)
A HELOC is simply a loan set up as a line of revolving credit for some maximum draw, instead of a fixed loan amount in which your home is collateral. HELOCs can be used to pay for several important items:
- College education tuition
- Private school education
- Home improvements
- Home renovation
- Major medical bills
Once you are approved for a certain amount of credit which is called your credit limit. Your credit limit is the maximum amount you may borrow at any one time. Most mortgage lenders set the credit limit on a HELOC based on a percentage (i.e.75 percent) of the home's appraised value which is then subtracted from the balance owed on the existing mortgage.
In setting your credit limit and approval of the home equity line, the lender will also consider your:
- Credit history
- Income
- Ability to repay loan
- Debts
- Other financial obligations
Several home equity lines allow you to borrow funds during a fixed period, such as 10 years. After this draw period, you may renew the line of credit. However, if your HELOC does not permit renewals, you cannot borrow additional funds once the fixed period has ended. At the end of the fixed period, the lenders may require payment in full or may permit repayment over a fixed period.
The most critical part of the HELOC process is one of approval. Once approved, you most likely will be able to access your credit limit at your convenience. Generally, accessing your funds is a simple process just like a regular checking account. You can write checks when paying for an item to draw on your line. Some home equity plans give you a card that can be used like a credit card for payment of items.
Your HELOCs draw period usually lasts 5 to 10 years during which you can use the equity line and may only have to pay interest. The HELOC interest is calculated daily not monthly. Your repayment period is on average 10 to 20 years, during which you must make monthly payments to principal equal to the balance owed at the end of the draw period divided by the number of months in the repayment period.
Some home equity plans state that the complete balance is repaid at the end of the draw period and you may choose to refinance at that point. Other home equity lines give you the choice to convert it into a fixed-rate loan at the time of a drawing. This flexibility comes in handy when you draw a large amount at one time. Before making any decision on HELOCs, get a quick rate and discuss your options with a HELOC expert.