Of all the ways to access your home's equity, the Home Equity Line of Credit (HELOC) may be the most misundertstood. Is it right for you?
1. What is a Home Equity Line of Credit (HELOC)?
Home equity lines of credit, or HELOCs, serve as a revolving line of credit similar to a credit card, but with some very big differences. A HELOC is typically taken out in addition to your existing first mortgage, and lets you borrow against your available home equity with your property as collateral.
Therefore, a HELOC is considered a second mortgage and will have its own term and repayment schedule, completely separate from your first mortgage.
2. What is a draw period?
HELOCs allow you to withdraw from your available line of credit as needed during a "draw period", which typically lasts ten years. During this draw period, customers pay off their principal and interest. At the end of the loan, customers may then owe a large sum of money, referred to as a balloon payment.
The repayment period for these outstanding balances usually lasts twenty years and covers any principal not paid during the life of the loan. Want to learn more?
3. Understanding HELOC interest rates + closing costs
Other important aspects to HELOCs are their interest rates and closing costs. HELOC interest rates are typically variable and change in conjunction with an index based on your credit profile.
The higher your credit score, generally the lower the index markup. Regarding closing costs, a unique aspect of HELOCs is that they usually have no (or relatively small) closing costs compared to home equity loans and first mortgage refinances.
Is a HELOC Right for You?
HELOCs are best for situations where you need to access funds—but at different times (as opposed to all at once). For example, consolidating higher-interest rate debt on other loans such as credit cards. Tapping into your home equity can allow you to save both money and time. If you're interested in learning more, we're happy to help.