A home equity line or a HELOC (Home Equity Line of Credit) is very similar to a credit card. The lender here promises you to advance a certain amount of money depending upon the value of your house and you can draw money as and when you want either by using a special credit card or by writing a check. However the repayment time period would be decided by your lender.
A HELOC is usually a second mortgage. It could even be your first mortgage in case you use it to refinance your existing mortgage. Although this could help you in saving a lot of money, there are certain risks that are associated with HELOCs.
There are two kinds of loan periods in HELOC:
Draw period: A draw period is a time period within which you can use your home equity line of credit. This could be anywhere between 5 and 10 years. During this period you only have to pay the interest on the outstanding amount.
Repayment period: A repayment period is one where in you have to make your payments. This time period may vary from 10 to 20 years. The amount that you need to pay on a monthly basis during this period is calculated by dividing the principal amount by the number of months in your repayment period. Certain HELOCs may make it mandatory for you to pay back the entire amount at the end of your draw period itself. In such cases you may have to go in for a refinance.
There are three things you need to consider while applying for a HELOC:
The Current Value of your Home: The draw limit of a HELOC is based on your home equity value which you will know by getting your home appraised.
Your Existing Mortgage: This refers to the amount that you have borrowed to buy your home minus the payments you may have already made.
Loan-to-value ratio (LTV): This is the ratio of your loan to the value of your home.
There are many websites and apps that include HELOC calculators. You can use these to find out how much money you can borrow. Once you have determined the above three amounts, you should be able to get the exact amount of home equity line that you will be eligible to borrow. However, you have to make sure you will be able to pay back the amount that you borrow, before you apply for a HELOC. Read the terms carefully before making the jump.
The best thing about HELOC is that the rate of interest is lower than conventional mortgages and you get a tax deduction on the interest that you pay. The amount can be used to consolidate your debts, refinance your existing mortgage or make improvements on your home.
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