A HELOC is a similar concept to a credit card. However, you use the funds when you need it! The life of the loan is decided at the time of the loan closing. As the money is used, a calculation is made to factor repayment and rates.
With that basic structure described, it’s useful to define some important words that are used with your Home Equity Line Of Credit (Heloc).
Here are some fundamental terms when considering a Heloc:
Draw Period: The first part of a HELOC is the draw period. During this time, you, as the homeowner, may borrow amounts within the credit line at your discretion. The draw period allows you to withdraw money an unlimited number of times and interest-only payments, not principal payments, are required on the money borrowed.
Although the draw period allows you unlimited access to your money, home equity loan requirements do not force you to withdraw the total loan amount. At the end of the draw period, you only repay the amount used. When the draw period is over, you generally will not be able to access remaining funds even if a portion of the money is unused.
Repayment Period: The second half of a HELOC is the repayment period. During this time, you pay back the amount borrowed. Lenders stipulate the timeframe of the repayment period as well as the draw period.
Variable Rates: HELOC rates are based on adjustable interest, which is dependent on the printed Daily Prime Rate. HELOC rates will fluctuate, which means you can expect them to change over time.
Home Equity Line of Credit Calculator: A HELOC calculator will help determine monthly interest-only payments along with calculating principal and interest payments that will come due at the end of the draw period. With a variable HELOC rate, the home equity line of credit calculator comes in handy.