HELOC/HEloan

Home Equity Line of Credit (HELOC)

A HELOC allows you to take advantage of your home’s equity. It is the value of the home minus the amount you owe on the primary mortgage. A HELOC works like a credit card in that you have a line of credit that you can access for your financial needs. The funds from the HELOC can be used for debt consolidation, home improvements, as a second mortgage loan for a home purchase to avoid paying mortgage insurance, or for anything else you desire.

The credit line limit you are approved for is decided by your lender. It’s based upon how big of a line is needed, the current value of your home, how much you owe on your first mortgage, your FICO scores, and how your monthly income compares to your monthly debt.

Your lender will establish a credit line that you will be able to borrow from over and over. You can borrow the whole amount up to the limit, or you can borrow a portion of it. As you pay off what you have borrowed, the balance of your line continues to be available to you, minus whatever you still owe. The amortization period for virtually all HELOCS is 30 years.

You will have to pay back what you owe with interest, but you can continue to withdraw as much as you need with separate transactions. It is up to you how much of your limit you withdraw.

You can withdraw only the funds you need versus getting one lump sum of cash for a typical loan, which may take longer to pay off with the added funds and additional interest. Furthermore, you only pay interest on what you draw, not the entire line limit.

The interest rate is based upon the consumer prime rate plus or minus a percentage. Most of the time, there is a 1% to 2.5% add-on to the prime rate, which is determined by the Federal Reserve Board, increasing or decreasing it at its discretion depending upon the monetary needs of the country, resulting in the HELOC interest rate increasing or decreasing exactly the same percentages.

A HELOC has draw and repayment periods. The draw period can vary but is, typically, 10 years. During that time, you can borrow from the credit line and, with many lenders, pay just interest only monthly rather than making the principal and interest payment.

Once the draw period ends, which can also vary, you can’t borrow against the credit line. This is when you start repaying what you owe with monthly principal and interest payments. Normally, this period is 10, 15, or 20 years.

Sometimes, lenders have introductory offers at significantly lower interest rates that are fixed for 3 to 12 months. When this time period ends, the interest rate is determined as described above.

Home Equity Loan (HEloan)

A home equity loan is like a HELOC in that it lets you borrow money using the equity of your home. Unlike a HELOC, though, the entire amount of the loan must be paid with monthly principal and interests payments beginning shortly after the loan closes, just like they are with a first mortgage. 

Normally, the interest rate will be higher than that for a HELOC and first mortgage, and is fixed for the term of the loan, usually 15 to 30 years.