The HELOC-What You Should Know About a Home Equity Line of Credit

You probably are fully aware of what a mortgage is, and you probably have an idea about home equity, too, especially if you’re a homeowner. But you may not know about a little something called a “HELOC”-or a home equity line of credit. It’s a special kind of mortgage, and if you want to know what that means, you’ll need to keep reading.

Home equity line of credit is usually a type of second mortgage. You may think that this refers to a home equity loan, but I assure you, it doesn’t. HELOC is special in that it gives you an account instead of a lump sum-that means that you draw out what you need, when you need it, and you’re not burdened with the entire loan all at once. You can access this account with a credit card or checking account, too. Usually, you must meet a minimum draw requirement for every withdrawal, and the time period during which you can make these withdrawals is often up to 11 years, but it could be shorter than that.

Here’s the thing that makes a HELOC great: the payments. On a home equity loan, when you receive the lump sum, you pay interest on the lump sum. On a HELOC, however, you only pay interest on the amount you’ve taken from the account-only on what you’ve used, in other words. That way, you’re not paying for money that you haven’t used.

There are two ways that a HELOC can amortize: either over a period of time following the draw period, or in total immediately at the end of the draw period. In the former case, the total term of the HELOC is from 15 to 30 years, and any time left after the draw period is the time you have to pay back the loan. In the latter case, refinancing is usually required to pay back the loan. After repayment, your prior agreement determines whether or not you have the credit extended again.

You should be aware of a few other details, too. A HELOC is often an adjustable rate mortgage, and though some are being offered as fixed rate mortgages, this is not (yet) common practice. It also may occur that the interest is calculated on a daily basis, and you should be aware of your HELOC’s margin before you get it.

Knowing more about the HELOC, don’t you feel more prepared to tackle home improvements and other needs your family has? Now that you know even more about home equity and about the HELOC, you can be more ready when the time comes to add value to your home (not to mention that HELOC funds are tax deductible!).