A home equity line of credit (HELOC) is one way to access the equity you have built up in your home. Unlike a regular equity loan which pays out the full amount of your loan when you close, a HELOC allows you to request an advance of a certain amount of money when you like using checks or a type of credit card.
HELOCs features a draw period during which you have access to your line of credit, and a repayment period during which you make payments towards the loan. The draw period on most HELOCs is five to ten years. During the draw period, you will only pay interest on the balance. The repayment period, meanwhile, may be anywhere from 10-20 years. Payments made during this time go toward principal. There are some HELOCs that require you to pay your full balance when your draw period is over.
The majority of second mortgages today are HELOCs. You can choose to make a HELOC a first loan, though, if it is used to refinance your mortgage and you have enough equity.
If you have ongoing needs for money, such as home remodeling that will take some time or irregular income you want to supplement, a HELOC will most likely be better for your situation than an equity loan. There are many advantages to choosing a home equity line of credit:
HELOCs are a popular way for homeowners to consolidate credit card or medical debt, take care of home improvement projects or remodeling, or even pay for college. You can expect the interest rate you receive to be higher than rates for first mortgages, but much lower than rates for credit cards or even personal loans. While you can save a substantial amount of money by consolidating debt with a HELOC, keep in mind that this is a secured loan. Your house will be the collateral and you risk foreclosure if you default.
While there are many benefits of a home equity line of credit, this type of loan is not right for everyone. Monthly payments are not always predictable, as most HELOCs have a variable interest rate that is tied to the Prime rate. Unlike an adjustable rate mortgage (ARM), which has a cap on how much payments can change, HELOCs rarely do, which means any changes in market rates can dramatically impact the affordability of your second mortgage.
If you want a loan that offers consistent payments or you are on a fixed income, an equity loan will likely fit your situation better.
There are several requirements that you must meet to be eligible for a home equity line of credit: