What Is A HELOC?
If you’ve spent any time researching mortgage loans, then you’ve probably come across the term “HELOC.” What is a HELOC? Well, it’s an abbreviated way of referring to a Home Equity Line of Credit. Basically, a HELOC is a loan that you can take out on your home. There’s a bit more to it than that though, so we’ll go over here in plenty of depth.
How a HELOC Works
We’ve already mentioned that a HELOC is a loan that’s taken out against a residential property. The house or land is used as collateral. Unlike a standard mortgage loan, where the money is advanced all at once and is used in order to pay for the property, a HELOC is given out as a line of credit. This means that you’ll have a loan that you can borrow from again and again until you reach the maximum amount that you took the loan out for.
Still confused? Here’s an example that shows how this works. You go to the bank and apply for a HELOC on your home. You’re approved, and receive a total loan amount of $40,000. You don’t have to use that entire amount all at once. Let’s say that you want to remodel your house, and the first thing on that list is new flooring. You can take $10,000 out of your HELOC in order to pay for carpeting, tile, or whatever type of flooring that you want. You still have $30,000 left in your HELOC that you can use to pay for any other remodeling, any general repairs, or really, anything else that you need. Some people use their HELOC in order to pay for a vehicle, take care of some credit card debt (this works because the interest rate on a HELOC tends to be lower than that offered by credit cards), or for anything else that you need.
Once you borrow money from your HELOC, you’ll need to pay it back. This is done monthly, much as it is with a standard mortgage. The main difference is that you can keep taking money out of your HELOC, as long as you continue paying it back and don’t hit your maximum amount, as long as you’re still within the draw period. You also won’t have to pay any large upfront costs, like you would with a traditional mortgage.
How Do You Take the Money From A HELOC?
Many banks treat a HELOC as they would a checking account. While you won’t necessarily have a debit card that you can use to access this money, you might have a set of checks attached to it. This makes handling things like home remodels, very easy to do. On top of this, you might be able to use your HELOC as an overdraft funding source on your checking account, just in case you accidentally overdraw your account. Again, this depends on the bank and how their rules and regulations regarding a HELOC, so make sure to inquire about your options while you’re applying for one.
The Draw and Repayment Periods
Before you begin to think that a HELOC is a neverending source of funds, one important thing needs to be said – each HELOC is subject to a specific draw period. This is the amount of time that you have to withdraw and use that money. As a general standard, a HELOC is set up on either a ten or 20-year cycle. You can use the money – by withdrawing it, of course – during this period. During that time, you just have to make interest payments in it in order to keep the account in good standing. (Of course, you can make principal payments as well. This is up to you.)
Once the draw period ends, the HELOC enters the repayment phase. You’ll have around the same amount of time in order to pay it off – ten or 20 years. All of this information will be clearly stated in the terms section of your loan form.
Interest Rates on HELOCs
One of the other major differences between a mortgage and a HELOC is the interest rate. The rates on a HELOC can change over time, and many are tied to the overall Federal Interest Rate. They’re usually a few percentage points over that rate, so when it changes, the amount of interest that you owe does as well. With that said, there are rate caps in place, you won’t see your HELOC rates go up exponentially.
So, what is a HELOC? These are home equity lines of credit that can be used for many different purposes. The amount that you can take out varies, but you’re able to withdraw the funds a little at a time, in order to pay for many different things. They are quite useful this way.