Before going with a HELOC, it is critical to do your research to see if the pros outweigh the cons for your specific financial situation. Here is everything you need to know about a HELOC. To the mortgage professionals who frequently read our site, we encourage you to send this article along to your clients who have questions about HELOCs.
A HELOC allows homeowners to tap into the value of their home for money. Different from other financing options, HELOCs also offer a line of credit that allows you, the homeowner, to withdraw money, repay, and then withdraw more as needed during the draw period. This can be a great strategy for some homeowners—but there are downsides.
In other words, HELOCs function like a credit card; as you repay your outstanding balance, your amount of available credit is replenished. The draw period for most HELOCs is between 10 and 15 years, during which time you can withdraw and replenish your funds as you like. In this period, you can also make interest-only payments. When you enter the repayment period—which is usually between 10 and 20 years—you start making monthly payments on the principal and the interest to your lender.
Most HELOCs have adjustable interest rates, meaning that as baseline interest rates increase or decrease, the interest rate on your HELOC will adjust as well. The interest on your HELOC will more closely resemble a mortgage rate than a credit card rate, however, since it is secured against the value of your property.
Lenders set your rate first with an index rate. Depending on your credit profile, your lender will then add a markup. In most cases, the higher your credit score, the lower your markup. The markup is known as the margin. Prior to signing off on the HELOC, it is important to see the amount.