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.
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