Understanding Home Equity Line of Credit

Equity is one of the primary benefits of homeownership. It is a way for the average person to build wealth. You can also leverage home equity with various loans. One way to do this is with a home equity line of credit (HELOC). This post will cover what homeowners need to know about home equity lines of credit.

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Using a Home Equity Line of Credit

The Basics

Equity refers to the portion of value an owner controls in their home. As an owner, you accrue equity as you make mortgage payments. Equity can also grow as a property’s value increases. A HELOC allows you to access some of this value. Through a HELOC, you have revolving credit. That means you can borrow and repay on a continuous cycle.

HELOCs are advantageous because they usually offer lower interest rates than unsecured loans, and they provide ways to borrow a larger sum than other loans. As revolving credit, you can also borrow multiple times without needing to get approval every time.

Borrowing Limits

One of the first points to understand is that there will be limits on what you can borrow. Most lenders only allow homeowners a line of credit up to 80% of the equity.

Upfront Fees

Some lenders may charge upfront fees for a HELOC. There might be an application fee for processing the loan. Borrowers might also need to pay for an appraisal and various closing costs.

The Draw Period

Every HELOC will have a draw period. It is the period during which the borrower can use the funds as they need. Most HELOCs have a draw period of five to ten years.

Some lenders may require minimum withdrawals from the line of credit. They may also require the borrower to leave a minimum balance on the line of credit. Some may also require minimum payments during the draw period, while others require no payments until the repayment period.

The Repayment Period

Once the draw period is over, you enter the repayment period. The borrower can no longer draw on the line of credit during the repayment period, and payment terms can vary significantly.

The lender might outline terms for monthly payments to start during the repayment period. However, some HELOCs might require a balloon payment. In that case, you might need to refinance with the lender to get monthly payments.

It is important to note that you are putting your house on the line when you take a HELOC. Take the time to investigate your options and make sure you understand all the terms.

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