HELOC Loan (Home Equity Line of Credit)
A HELOC Loan is an “open-ended” loan, a line of credit funded by home equity. It allows you the borrower to “draw-out” funds against the available equity in your home as needed.
This loan product allows you to “draw-out” funds on the established line of credit over time. Special checks or a credit card is often provided for you to receive funds. The credit limit is usually based on a ratio of the equity in your home. As you pay down the principal, you can draw the remaining amount of your available credit again. This loan feature is known as the “draw period.” This period usually lasts for ten years, or for a noted fixed term in the future. After the draw period ends, the borrower typically will enter the “repayment period.” During this time they must pay off the outstanding balance in regular periodic payments of principal plus interest. The repayment period is also a fixed term of years, like a second mortgage. HELOCs have costs and fees associated with them just like other loan options.
Lender policies vary as well as their HELOC agreements. So make sure you understand all the options. In a worst-case scenario, you may have to pay back the whole amount you borrowed as soon as the “repayment period” begins. If the value of your home decreases significantly, your lender may no longer allow you to take out additional funds. Also, if your financial circumstances change and your lender doesn’t believe you can still make your payments. The lender may also freeze your ability to take out additional funds. This could happen when variable loan rates continue to rise. The HELOC – Home Equity Line of Credit will typically have a variable interest rate that changes over time. This means your payments could go up from month to month during a period of inflation.
