AEM Mortgage Minute with Deanna Daughhetee

What is a Home Equity Line of Credit?

Tuesday, July 21, 2009

A Home Equity Line of Credit, or HELOC, is secured by real estate—usually a primary residence and provides the ability for the homeowner to draw funds as needed up to a maximum amount. This type of loan can be ideal if you have one-time or ongoing financial needs, such as home improvements, education expenses or medical bills.

Most lenders determine the amount of a HELOC by using the appraised value of a home, minus the amount of money still owed on the mortgage. If the appraised value is $150,000 and the homeowner still owes $100,000, then there is $50,000 equity in the home. Most lenders will allow a homeowner to borrow up to 75% of the available equity, which in this case would equal $37,500.

HELOC’s have a draw period, which is the time period a borrower can withdraw money from the line either by using special checks or credit cards. This draw period is generally between 5-10 years, and the borrower is only required to pay interest during this time. One of the biggest advantages to a HELOC is the borrower is typically only required to pay interest on the amount they have drawn from the account. For example, if you have a $37,500 line, but have only drawn $7,000, your monthly payment is based on the $7,000 balance.

Once the draw period is over, the HELOC may enter the repayment period or need to be paid in full, depending on the terms of the credit line. Many borrowers simply refinance their mortgage to pay the HELOC off.

If you are considering a HELOC, be sure to speak to a home loan expert to ensure you have a clear understanding of the terms of the loan and the loan process.