Home
Equity Lines of Credit, or HELOCs, are open-ended, revolving loans that allow
future advances up to the approved credit limit. Much like credit cards, they
offer cash when it is needed with flexible payment options during the draw
period. The draw period of a Home Equity Line of Credit is the amount of time
the line of credit is open for, usually ten years, after which the balance must
be paid.
Advances
taken out during this draw period may have small monthly payments in which only
minimal amounts are paid toward the principle with the rest of the payment
going to accrued interest, or interest only payments may be made. At the end of
the draw period, many plans have balloon payments in which the monthly payments
will drastically increase to cover the rest of the balance due or the entire
balance may be due immediately. There are plans that offer repayment of the
Home Equity Line of Credit loan over a fixed period of time after the draw
period has ended.
Interest
of Home Equity Lines of Credit is usually variable and tied to the Prime
Lending Rate, the rate in which most major banks charge their largest and most
credit worthy customers. These variable rates usually have a cap to limit how
high of an interest rate can be charged and some have limits as to how low the
interest rate can get. Variable rates are subject to quarterly adjustment
though some plans offer a fixed interest rate. The interest paid on Home Equity
Lines of Credit is only paid when the funds are used and is usually tax
deductible.
Like
Home Equity Loans, Home Equity Lines of Credit have fees that may be charged
for taking out the loan. Some plans call for one-time; up front fees while
others have annual fees. Plans that offer low monthly payments during the draw
period may require a balloon payment at the end of the loan period requiring
the entire remaining balance to be paid. Other fees can also apply such as
appraisal fee, credit check fee, and closing costs. The Federal Truth in
Lending Act protects the borrower by requiring the lender to inform the
borrower of all costs and terms when the application is given.
California
residence taking out a Home Equity Line of Credit have the option of whether or
not to allow outside and affiliate companies to have access to their private
financial information. Through the California Financial Information Privacy
Act, the lender can only disclose financial information about California
residences with other companies if it is mandatory in securing the loan. Any
other use of the information is at the borrowers’ discretion.