Home Equity Line of Credit Information
A home equity line of credit (HELOC) goes by many different names, including home equity line, home equity, and sometimes second mortgages. These lines of credit may be in first, second, or other lien position. However, unlike a second mortgage, a HELOC is actually where a borrower receives a credit address instead of a cash payment. This brand of credit is available for the borrower to withdraw money when he needs additional cash. This is one way a homeowner uses the equity he has built up in his home over years of making monthly mortgage payments. Homeowners often use the money drawn from this credit edge for home repairs and renovations, debt consolidation, or a major purchase. Most lenders’ maximum on a home equity line of credit is 85 percent of the appraised value of the home or property with the amount the borrower owes on the first mortgage subtracted. The HELOC is very similar to a credit card in that it has a maximum amount of credit that the borrower can withdraw from when cash is needed.
A homeowner’s mortgage loan balance increases as they use their credit edge, but is different in that interest will accrue daily. These interest rates are adjustable and are usually tied to the prime rate, so if it goes up, the interest rate on the line of credit will also go up. In most states, the maximum that can be charged on a credit agreement for interest is eighteen percent. There are also some HELOCs that will allow the borrower to convert their loan to a fixed rate loan. The owner does not have to make any payments on the funds withdrawn from the credit column until he has used the maximum allowed.
All home equity lines of credit have a specific draw period in which the homeowner can use the money in the account. These periods are typically five to ten years in length. During this period of time, the homeowner only has to pay the interest on the line of credit. There is always a specific payback period which is usually ten to twenty years. There is a formula regarding repayment of the line of credit which is that the homeowner must repay the balance of the loan by taking the balance and dividing it by the number of months in the repayment period. Lender fees for a home equity loan agreement are generally very low, and some lenders charge no fee at all. This depends on the lender and the area you live in.