What is a HELOC?
A HELOC, or Home Equity Line of Credit, is a loan designed as a line of credit for a maximum draw rather than a set dollar amount. Using your home as collateral, it allows you to borrow up to a certain amount. Most HELOCs are considered second mortgages. This loan solution as a substitute for a first mortgage could save you money short term.
HELOCs are usually paid off within ten to thirty years. This is what’s known as the draw period. During this time frame, you have the ability to withdraw money as you need it. There are two types of HELOCs: interest-only draw period, and interest and principal draw period. The interest and principal option helps you to pay off the loan sooner. As you pay off the principal, your credit revolves and you’re able to access it again. When a line of credit has expired, the repayment period begins in which you pay the lender the outstanding balance including interested owed.
For example, you’ve been approved for a $10,000 HELOC and you’ve borrowed $5,000. If you were to pay back $3,000 towards the principal, you then have $8,000 available credit.
A HELOC has a variable interest rate, As the prime rate moves up or down, so does your HELOC rate.Payments will vary depending on the interest rate and how much available credit you have used.
Pros of a HELOC loan:
- Lower cost than many other types of loans
- The ability to borrower a large amount
- Flexibility to use the cash at your discretion
- Potential tax breaks if you use the funds on home improvements that increase the value of your home