HELOC - Home Equity Line of Credit

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Home Equity Line of Credit

What is a HELOC?

HELOC stands for Home Equity Line of Credit, or Equity Line of Credit. This type of loan is very much like a credit card, only with a second loan on your home used as collateral. You are given a maximum draw amount instead of a lump sum at the time of loan approval. You draw and payback from your equity line as much as you want, up to your maximum approved limit.

What are the advantages of an equity line of credit?

You can use your HELOC to write checks and pay off credit cards, small loans, pay for college tuition, finance home improvements, etc. You will only pay interest on the amount of money withdrawn against your equity line and not the maximum draw amount. Again, they are very similar to credit cards in this respect.

Another advantage of an equity line of credit is you can keep your primary home loan, your "first", and get a HELOC as a "second". This is great if you have a very low interest, fixed-rate first mortgage and you do not want to change that loan just to withdraw some of your equity. You simply get an equity line of credit and your "first" doesn't change.

How much will it cost to get a HELOC?

The fee's required to setup an equity line of credit will vary with each lender. However, a HELOC is tpically much cheaper to acquire than a conventional refinance loan.

What are the disadvantages to a HELOC?

You can potentially have a balloon payment in ten to twenty years and be forced to refinance your home in order to pay off the equity line of credit.

The interest rate on an equity line of credit will fluxuate much quicker than normal adjustable-rate-mortgages (ARMs). If rates go up, you can expect to see an increase in your HELOC interest rate the very next business day.

What questions should I ask when inquiring about a line of credit?

What is the net cost to establish my line of credit?

How long is my draw period?

How long is the repayment period?

Am I required to pay my loan in full at the end of the draw period?