A Home Equity Line of Credit (HELOC) is a financial solution for those with at least 20% home equity ownership. Your home equity is used as the collateral for this kind of loan. As you pay off your mortgage, your available revolving credit limit will increase. They are a good solution for anyone looking to set up a monthly repayment schedule for a fixed period to pay off your loan. Many individuals use HELOC as their second mortgage.
A home equity line of credit operates similarly to other types of credit, but it is revolving. You can gradually access your available funds as you need them. They have a draw period, usually 5-10 years long, during which you pay interest only. The draw period is followed by a repayment period (10-20 years), during which you pay both, the principal and interest.
Since your home equity secures the line of credit, you will receive so-called HELOC interest rates that are lower than those of unsecured lines of credit. HELOC interest rates are tied to prime lending rates and are typically variable. However, most lenders will offer you the option to lock in portions of your HELOC interest rate.
Home equity lines of credit are interest-only loans, so your minimum payment will equal the monthly interest on the amount you borrowed. If you have not repaid the loan after a certain period of time (typically ten years), your payments will also include the principal and will, therefore, increase.
To assess whether or not a HELOC is the most suitable mortgage solution for you, it’s best to speak with a mortgage professional to determine its pros and cons and explore other available options on the market.
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