Home Equity Line of Credit FAQs
Easily Learn About Borrowing Against Equity in Your Home
You may have the option to borrow against the equity in your home if your current mortgage balance is less than the value of your home. Two popular options for doing this are taking out a home equity line of credit or a home equity loan. MidCountry Bank offers both of these financing solutions.
What is a home equity line of credit (HELOC)?
A HELOC is a line of credit secured by your home that gives you a revolving credit line, in some ways like a credit card. The differences are that instead of borrowing from a credit card company, you're borrowing from the available equity in your home, and the house is used as collateral for the line of credit. But like a credit card, as you repay your outstanding balance, the amount of available credit is replenished, which means you can borrow against it again if you need to, and you can borrow as little or as much as you need, up to your pre-set limit. Typically you can draw money from your HELOC for 10 years, with a 15-year repayment period.
Home equity lines of credit are often used to pay for home improvement projects, including those intended to increase the value of your home or to consolidate higher-interest rate debt on other loans (such as credit cards).
Understanding the basics
Here are some basic things to know about home equity lines of credit:
In order to qualify for a home equity line of credit, you must have available equity in your home. In other words, the amount you owe on your home must be less than the value of your home. Most lenders will allow you to borrow up to 80% of the value of your home minus the amount you owe. Your lender will also typically look at your: credit score and history, employment records, monthly income, and monthly debts, just like they did when you first got your mortgage.
A financial indicator used by banks to set rates on many consumer loan products. Most banks use The Wall Street Journal Prime Rate.
The margin is the amount added to the index, such as The Wall Street Journal Prime Rate, to determine the interest rate for your home equity line of credit.
Your lender will calculate your line of credit limit. Here is an example of the calculation.
The draw period.
The "draw period" is the period of time during which you can pay for expenses with your home equity line of credit. Depending on the terms, the draw period will vary, but typically it will be up to 10 years. Simply transfer funds to your checking account using online banking or contact your banker to advance available funds for you. When you pay for expenses and have borrowed against your home equity line of credit, you'll receive a monthly bill with a required minimum payment, similar to the way you would for a credit card. It's essential to make your payments on time, and highly advisable to pay more than the minimum (especially if that minimum covers interest only), so that you're paying down your principal. This may not only reduce your overall debt more quickly, it may also help you save on the interest you pay.
You will be charged interest for any money that you borrow against your credit line. Due to the fact that home equity lines of credit have variable interest rates, your interest rate may vary from month to month. Since it is technically a home loan, the interest paid on a home equity line of credit is usually tax deductible, so you could potentially save on the interest you pay (everyone's situation is different, so you should talk to your tax advisor regarding interest deductibility for your personal situation). Be aware that lenders have the right to modify your credit line at their discretion by decreasing the amount of funds available. In such cases, they are obliged to inform their customers of these changes to their credit limits.
The repayment period.
Home equity lines of credit have an "end of draw" date, after which you may no longer borrow against your home equity line of credit. On this date, the repayment period also begins, which is typically about 15 years. During the repayment period, you'll be required to make the monthly principal and interest payments needed to fully pay off the home equity line of credit by the end of the repayment period.
If you were to make interest-only payments during the draw period of your line of credit, you could find yourself with a large balance and unexpectedly large monthly payments when your repayment period begins. To avoid this payment shock, it's recommended that your monthly payments during your draw period cover principal and interest so that you're paying down as much of your principal as possible during the draw period.
The home equity line of credit checklist
While many lenders offer the same features in their home equity lines of credit, some features will vary. Comparing these points as you shop could make a difference in your payments:
Is a home equity line of credit right for you?
Home equity lines of credit give you the flexibility to use your credit at any time for any expense; however, that flexibility usually comes with a variable interest rate.
So before you get a home equity line of credit, consider things like whether a variable rate suits your needs, how much you think you'll need to borrow over what period of time, and whether you'll be able to make the payments in full and on time in order to maintain your credit rating and keep your homeownership secure. Since your house is used as collateral for your credit line, it's important not to fall behind in your payments and put your home at risk of foreclosure.
When borrowing from a home equity line, mortgage, credit card or any other credit product, it's important to borrow only the amount that you can comfortably afford.
All loans subject to credit approval and compliance with underwriting standards.
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