| Considering a HELOC loan? First you need to know what it is and how it works. Here are some HELOC loan tips to get you started.
A HELOC Loan Can Be A Very Useful Tool For Home Owners With Ongoing Expenses
A HELOC loan, also called a home equity line of credit, gives homeowners access to loan funds on an ongoing basis. This is referred to as the draw period. During this time, homeowners use a credit card, checks or account transfers to take money from their home equity line of credit. Common uses of HELOC loans include home repairs, educational expenses, and paying off credit card debt
Unlike a home equity loan, which provides a one time pay out, a HELOC loan provides pay outs up to the total loan amount over several years. The draw period, or time during which the homeowner can tap into the home equity line of credit for funds, usually lasts 5-10 years. Monthly payments during the draw period are only for the interest amount of the outstanding balance. Payments may be tax deductible. The draw period is followed by a repayment period. During this time the homeowner can no longer draw funds from the HELOC loan. The repayment period can extend as long as twenty years.
HELOC Lenders Impose Limits on HELOC Loans
The amount of money the home owner can borrow is based on the LTV, or loan to value ratio (what you owe versus how much your home is worth). Eighty-percent is a common ratio; loans exceeding the 80 percent ratio are called high LTV loans. These HELOC loans carry higher interest rates.
Whether or not a HELOC loan is appropriate also depends upon the amount of equity in the home. The amount of equity in the home is determined by subtracting the total value of payments made to the principal of the original loan amount. The resulting number is then subtracted from the current appraised value of the home. Some HELOC lenders require a minimum loan amount and a minimum draw. A HELOC calculator can help you figure out how much equity you have in your home and if tapping into that equity is a smart financial move.
HELOC Loans Carry Adjustable Interest Rates
A home equity line of credit is a type of ARM (adjustable rate mortgage). The rates on these loans adjust daily rather than monthly as is the case with standard ARM’s. Some HELOC lenders offer a reasonable cap on HELOC rates. Monthly payment amounts vary based on interest and loan balance.
Although it is an increasingly popular option a HELOC mortgage is not ideally used as a first mortgage. Why? Because HELOC rates are calculated daily, this may make payments unmanageable for home owners. Some HELOC lenders offer a home equity line of credit with no application fee, no points and no closing cost options. Most HELOC lenders assess an annual account fee.
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