HELOC- Home Equity Line of Credit Explained

Introduction

  • A home equity loan is also known as "HELOC" 
  • A home equity line of credit is a loan in which a lender agrees to lend a maximum amount within a time period, where a security is the borrower's equity in his home like a second mortgage. 
  • A home equity line of credit is like a credit card because in home equity line of credit a borrower is allowed to borrow up to a certain limit by the lender for a specific time period. 
  • In home equity line of credit is more flexible than home equity loan. 
  • A home equity line of credit is a line of credit which is extended to a homeowner that uses a borrower's home as a security. 
  • Borrowers are pre-approved for a fixed spending limit based on income and credit record and may draw on this limit at their choice. 
  • An interest is charged at a pre-planned changed rate, which is normally based on current rate. 
  • If there is a balance owing on the loan an owner can select the repayment plan, as long as minimum interest payments are made monthly. 
  • The time period of HELOC can be between five years to twenty years and completing the period the remaining amount is to be paid fully. 
  • An interest is paid just on the real amount borrowed and it has no closing cost. 
  • A home equity line of credit is a line of credit secured by owner's home which gives you a revolving credit line to use for big expenses or to connect higher interest rate debt to other loans like credit cards. 
  • HELOC has a lower rate of interest as compared to other loans and an interest charged is generally deductible under income tax rules. 

For example:

If Your house has an appraisal value of Rs 10,00,000 and home equity line of credit is available to 80% of value that is 8,00,000 and if you have borrowed Rs 5,00,000 so now you are only eligible to draw up to Rs 3,00,000 as a home equity line of credit.

How It Works:

  • In home equity line of credit, a borrower set an amount with an interest rate and make equal payments for the whole loan term which may be from 5 to 30 years. 
  • In home equity line of credit, there are two parts 

1) Draw period

  • A period in which a borrower can draw an amount like for the first 10 years and once the draw period ends a borrower cannot borrow after that period. 
  • During the draw period, a borrower no need to make payments 

2) Repayment period

  • A period in which repayment of the loan amount is done like last 20 years. In repayment period, an amount becomes higher because it includes amount plus interest. 
  • At the end, if the amount becomes large enough and the borrower is not able to pay a loan amount. In this situation, a borrower becomes a defaulter and he can lose his home which is put as a security for a loan.

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