What is HELOC?
HELOC stands for “Home Equity Line of Credit” or “Home Equity Line”. This type of loan is for those that are thinking of a home renovation or planning for a major expense.
This loan is not a fixed amount rather is is set up as a line of credit, for example with a typical loan you borrow $50,000 and you would end up paying for the entire amount in the end. For HELOC you would receive up to $50,000 and you draw from this line in any increments you would like.
HELOC typically are second mortgages or in a lot of cases it is a first mortgage if you are using it to refinance your existing first mortgage. While using HELOC can end up saving you a lot of money, it is also important to know the risks involved which is covered further down.
What To Know:
HELOCs have a two term periods. This includes a period where you can draw money from the line that you have taken out and another period in which the amount must be paid off. Draw period are typically about 5- 10 years and you usually just pay off the interest during that time. The repayment period is around 10-20 years and you pay monthly payments. It depends on the lender on your repayment plan and how much you are to pay off by the end of the period so make sure you talk with a lender and write down everything to make sure you are clear.
Since your balance on HELOC loans change from day to day, because you might draw money or repay on a daily basis, interest rates are calculated on a daily basis rather than a monthly basis.
APR on a HELOC is the same thing as an interest rate so try not to get confused since they are different on a standard loan. APR for HELOC does not reflect points or other upfront costs. APR is shown because it is just an added protection.
HELOCs are great for funding immediate needs such as paying off credit cards, college tuition, or making home improvements because you draw and pay interest on only the amount that you need. The upfront costs are also pretty low and some loans can be converted into fixed-rate loans at the time of the drawing which is helpful for borrowers who take out a large amount at one time.
If you take out a line of credit with banks such as Wells Fargo have annual and lifetime rate caps, which means that the rate on the line of credit will never increase more than 2% in a year and never more than 7% higher than when from when you started. You are also able to convert your variable-rate balance into a fixed rate, and banks like Wells Fargo help you to rebuild the equity. So even though there is still risk involved there is a lot of benefit with taking a HELOC loan through a big bank.
During the course of your loan you only have to pay off the interest rate. The interest rate is bound to change during the course of your loans life, so while it may decrease it could also increase and keep increasing. So there really is no protection against rising interest rates and there is no cap to the interest rates. So if you are taking out a large loan than you might want to reconsider this type of loan for your needs.