Understanding the Basics – Terminology Definitions
The following is basic terminology to help understand home equity lines of credit:
Rate Lock Option
A home equity line of credit will typically have a rate that is fixed for a period of 3 - 15 years with established monthly payments. This payment stability can make it easier for budget management.
Contact a MidCountry Bank home equity expert today to discuss rate lock options.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the rate charged for borrowing funds, and is expressed as a percentage representing the yearly cost of funds over the term of a loan.
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. Many 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 history, monthly income, and monthly debts, just like they did when you first applied for your mortgage.
The index is a financial indicator used by banks to set rates on many consumer loan products. MidCountry Bank indexes to 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:
Assuming the lender allows a maximum credit limit of up to 80% of your home's value and your home appraises for $300,000, if you owe $150,000 on your current mortgage you may qualify for a credit line amount of up to $90,000. ($300,000 x 80% = $240,000 - $150,000 = $90,000) 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 "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. For added convenience, you may also have HELOC checks allowing you to advance directly from the HELOC by writing a check.
When you 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. If your home equity line of credit has a variable interest rate, your interest rate could vary from month to month.
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 begins. 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.