All About Home Equity Line of Credit (HELOC)

How Does HELOC Work?

Home equity line of credit (HELOC) works like a credit line. You will receive special “equity” checks that can be used to advance yourself a loan up to your approved available balance. Simply write the loan amount you need.

Some lenders will also provide credit card-like access to your HELOC line account. You can use this like a credit card and all transactions will be posted to your home equity line account.

QUICK TIP: Over the life of a loan, remember the loan with an overall lower APR is less costly than a loan with a higher APR.
One word of caution. Even though your account is protected against fraudulent use, the last thing you need is to have your home exposed to potential fraud in the event you lose your card or someone obtains access to your card numbers.

It’s recommended that you use the special equity checks to access your HELOC account. Keep and protect them in your home. Never carry these checks with you.

When you need to access your home equity line of credit account, write the loan amount you need with your equity check and deposit it in your bank checking or money account. Then use the debit or check card that came with your money account to charge transactions at retail and other establishments.

How Are HELOC Rates Determined?

Home equity line rates are variable and indexed to the PRIME RATE or some other rate index. This means your rate can increase or decrease whenever the PRIME RATE changes. The rate (APR) is calculated by taking a margin (percentage) and adding it to the PRIME RATE.

Whenever the PRIME RATE increases, your monthly payment due will likewise increase. Whenever the PRIME RATE decreases, your monthly payment due will likewise decrease.

The interest (APR) that will be charged to your home equity line of credit account will be only on the amount you actually use, not on the total amount of your credit line.

If the lending institution uses an index other than the “PRIME RATE,” request to view historical changes for the index rate being used. Compare this trend against the historical trends for the “PRIME RATE” to note frequency changes in APR and how high the interest rate has climbed.

All HELOC accounts must list the rate cap for the account. This cap may vary by state.

What Are HELOC Payment Terms?

Minimum payment terms for home equity lines of credit may include one of the following plans:

Interest only plus any penalty-related fees
Percentage of the principal plus interest and any penalty-related fees
Keep in mind that any principal repayment will not reduce your balance to zero at the time your HELOC account closes. You must pay an additional amount to reduce your balance to zero over a repayment term.

These repayment terms may vary by lender. You should be able to pay down your home equity line account at any time without prepayment penalties. If not, find another lender.

With most programs, you can advance yourself a loan as many times as your like, as long as the advance does not exceed your approved available balance:

The advance feature is usually available for 5-10 years at most lending institutions, at which time you may renew your home equity line option, pay off the loan amount, or convert your home equity line balance over to a fixed rate equity loan amortized at repayment terms set by the lender.

Again, these terms may differ by lender. Some lenders do not offer a renewable feature or allow conversion of the home equity line balance over to fixed-rate amortized loan.

Be sure to review the terms before making your final decision.

Home Equity Loans

How Do Home Equity Loans Work?

The home equity loan is a fixed rate loan. The money is advanced to you when you close your equity loan. This advance is a one-time loan, with no further advances made on your account.

How Are Home Equity Loan Rates Determined?

Home equity loan rates are fixed and set by the bank. The rate will not go up or down during the repayment period of the loan.

What Are Home Equity Loan Payment Terms?

Your monthly payments are fixed. The amount and number of payments depend on the repayment terms of your loan. Lenders offer a range of repayment terms, generally from 5-20 years.

You may pay off your home equity loan at any time, but you should check the lender’s prepayment terms. Some lenders will charge a prepayment penalty under certain circumstances.

How Much Can You Borrow with HELOC or a Home Equity Loan?

The approved available home equity line or home equity loan balance is secured by the equity in your home. The total amount approved depends on your LTV position, which is determined by taking a percentage of the appraised value of your home and subtracting the balance owed on the existing mortgage.

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