What is a Home Equity Line of Credit (HELOC)?
A home equity line of credit (often called HELOC and pronounced Hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house (akin to a second mortgage).
A HELOC works more like a credit card. You are allowed to borrow up to a certain amount for the life of the loan -- a time limit set by the lender. During that time you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again.
What do I need to know about a HELOC?
Here are some basic things to consider when evaluating if a HELOC is right for you:
- Depending on your creditworthiness and the amount of your outstanding debt, you may be able to borrow up to 89 percent of the appraised value of your home less the amount you owe on your first mortgage.
- Most HELOCs have variable interest rates. These rates may offer lower monthly payments at first, but during the rest of the repayment period, the payments may change — and may go up.
- Similar to a real estate mortgage, HELOCs require you to use your home as collateral for the loan. This may put your home at risk if your payment is late or you can't make your payment at all.
What's the difference between a Home Equity Loan and a Home Equity Line of Credit (HELOC)?
This can be confusing to most because both Home Equity Loans and Home Equity Lines of Credit share some similarities, such as:
- Both loans are secured by the equity the borrower owns in his/her home.
- Both loans may be referred to as a second mortgage.
- Both loans’ interest may be tax-deductible (consult your tax adviser).
Home Equity Loan
- A fixed amount of money based on your home’s equity.
- A fixed rate of interest over a fixed amount of time.
- Single lump-sum distribution of the money with no option for the borrower to obtain additional funds.
Home Equity Line of Credit
- A revolving credit limit based on your home’s equity.
- The option to draw money at any time as well as multiple times, over a predefined time period.
- The ability to draw money in any increments.
- As soon as the principal is paid, the funds are instantly available for use again.
- A variable rate of interest that may fluctuate over the life of the loan.
What are approved uses of a Home Equity Loan or Home Equity Line of Credit (HELOC)?
A Home Equity Loan or Home Equity Line of Credit are very flexible and may be used for almost any occasion, including:
- Home improvements (large and small)
- Debt consolidation
- College tuition and expenses
- New automobile
- Automobile refinance
- Recreational vehicles (boats, motorcycles, ATVs)
- Unexpected expenses - medical bills, new furnace, etc.
What does “loan to value” ratio mean, and how does it affect my Home Equity Loan or Home Equity Line of Credit (HELOC) rates?
Loan to value (LTV) is a ratio comparing the amount of money a homeowner owes on his/her first mortgage versus the home’s current appraised value. Borrowers with higher LTVs usually pay a higher rate of interest because they are generally considered a greater risk of default than those with comparatively lower LTVs.
LTV is typically calculated as:
LTV = Mortgage Amount / Appraised Property Value
How can I access my Home Equity Line of Credit funds?
There are multiple ways in which bank customers may access their Home Equity Line of Credit funds.
- Credit Line Equity Access Checks or Credit Card - Funds may be accessed via credit line equity access checks or credit card transaction, using the Equity Access checks or card associated with your HELOC.
- Online - Simply log in to your online banking account and easily transfer money from your HELOC directly into your checking or savings account.
- Telephone Request, Request by Mail, in Person Request - Customers may call the bank, mail a request to the bank, or go in to a branch to request that available funds be transferred into your checking or savings account.
How many times may I access my Home Equity Line of Credit funds?
Customers have unlimited access up to their approved credit limit during a predefined time period.