A Home Equity Line of Credit (HELOC) is a second mortgage loan that homeowners can obtain by leveraging the equity they have built up in their homes. Unlike a traditional loan where borrowers receive a lump sum, a HELOC provides a revolving line of credit that can be accessed as needed within a predetermined credit limit.
HELOCs are typically secured by the borrower's home and offer a flexible borrowing option. Once approved, homeowners can tap into the available funds for various purposes, such as home renovations, debt consolidation, or other financial needs. They have the freedom to borrow as much or as little as they require, up to the credit limit, and they only pay interest on the amount they borrow.
The draw period is a crucial feature of a HELOC. It is a specified period, usually between 5 to 10 years, during which borrowers can access funds and make interest-only payments. This allows homeowners to manage their cash flow effectively and only pay interest on the outstanding balance. After the draw period ends, the repayment period begins, typically lasting around 10 to 20 years. During this phase, borrowers can no longer borrow from the line of credit, and they must start repaying both the principal and the interest.
The interest rate on a HELOC is often variable, meaning it can fluctuate over time based on market conditions. It's important for borrowers to consider this factor and understand the potential impact on their monthly payments. Additionally, the HELOC becomes due in full when the borrower sells their home. If you wish to refinance your first mortgage, your HELOC lender may require you to pay the HELOC in full prior to refinancing.
