A home equity line of credit is a type of second mortgage that allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Borrowers can use HELOC funds for a variety of purposes, including home improvements education and the consolidation of high-interest credit card debt for example. Sound a little confusing? We’ll break it down for you.
A HELOC has two phases that separate borrowing and repayment, also known as the draw period and the repayment period. Be aware, however, that you’ll make payments on the loan during both periods.
The first phase, called the draw period, is when your line of credit is open and available for use. During this period, you’ll be allowed to borrow from your line of credit as needed, making minimum payments or possibly interest-only payments on the amount you’ve borrowed. If you reach your limit, you’ll have to pay off some of what you owe before you can continue borrowing. If you want to extend your draw period, you may be able to refinance your HELOC to do so.
Once you reach the end of your draw period, you’ll no longer have access to the HELOC funds and will have to start making full monthly payments that cover both the principal and interest. This is the repayment period. If you’ve been making interest-only payments up to this point, be prepared for your payments to go up, potentially by a lot. The length of both periods will depend on the loan you get. For example, you may decide that a 30-year HELOC, with a 10-year draw period and 20-year repayment period, makes the most sense for you. Typically, lenders won’t allow you to borrow against all the equity you have in your home in order to keep your Loan-to-Value below a certain percentage. This is because lenders want you to have a certain amount of equity in the home, since you’re less likely to default if you could possibly lose the equity you’ve built up. Call a Mortgage Broker to talk about what you are looking to do and see if a HELOC is the right fit for your needs.
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