What is a HELOC?
If you need to borrow money to pay off debts or make a purchase, a home equity line of credit (HELOC) can be extremely useful. A HELOC is a revolving credit line secured by the equity in your home. This is an open ended loan that can be paid down or charged up for the term of the loan, very similar to a credit card.
A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. A HELOC may have a minimum monthly payment requirement (often “interest only”); however, the debtor may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding).
Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time. Homeowners shopping for a HELOC must be aware that not all lenders charge the same rate on their line of credits.
A popular reason for HELOCs is their flexibility, both in terms of borrowing and repaying on a schedule determined by the borrower.
Because the underlying collateral of a home equity line of credit is the home, failure to repay the loan or meet loan requirements may result in foreclosure. As a result, lenders generally require that the borrower maintain a certain level of equity in the home as a condition of providing a home equity line.
How do I aquire a HELOC?
With a HELOC, we will approve you for a specific amount of credit – the maximum amount you may borrow at any one time under the plan. In determining your credit limit, your income, debts, credit score and other financial obligations will be reviewed. An appraisal will likely be required to determine your home’s market value, but only about half of the time. (This generally depends on just how much equity you intend on taking out.) Your credit limit will be based on a percentage of your home’s appraised value.