Home Equity Lines of Credit: 4 Commonly Asked Questions
From Simply Smart Insights contributor, Pam Starr, Mortgage Loan Officer at Camden National Bank
Homeowners consider applying for a Home Equity Line of Credit (HELOC) for a variety of reasons. Frequently, they are looking to make home improvements or fund a college education. Sometimes, they are looking to plan a dream vacation or have a safety net of funds on hand in case of an emergency. Depending on your unique financial situation, a HELOC might be the right next financial step for you. Review the four FAQs below to learn more about HELOCs:
- What exactly is a HELOC? HELOCs are designed to put your home’s equity to work for you. In other words, HELOCs may allow you to borrow against the equity in your home without paying off your first mortgage. With a HELOC, you are given a specific line of credit, determined by the value of your home and remaining balance on your mortgage. For a simplified example – a couple owns a home worth $250,000, and they currently owe $150,000 on their first mortgage. This means, in theory, they have $100,000 in equity. However, the amount of that equity they can borrow against can vary, depending on the loan program.
With Camden National Bank, you can now apply for a HELOC through our online application system MortgageTouch. From your phone, tablet or computer, you can securely submit all necessary documents and information and apply with convenience.
- How does HELOC payment work? A HELOC allows you to write checks (drawn against the designated line of credit) as needed during a specified period of time known as the “Draw Period,” which is typically several years. HELOCs are usually structured with an adjustable interest rate, which means the interest rate you pay is not fixed—it could go up or down over time.
During the Draw Period, you are required to make minimum payments based on your current balance (but you can always pay more). Depending on the loan, the payment may be based on the current balance, the applicable interest rate, and other factors. The payment can fluctuate as these numbers change
At the end of the Draw Period, you enter the “Repayment Term.” During this time, the line cannot be used. Payments on the existing balance will be amortized over the Repayment Term in order to pay off both the principal and the interest.
- What are the key advantages of HELOCs? First off, you only pay for the money you use (i.e. you won’t have to pay interest on money you don’t use from your designated line of credit). In addition, rates may be lower than personal loans or credit cards. You can apply once for a HELOC and, if approved, you can use the line of credit repeatedly during the Draw Period. As you continue to make payments, those funds become available for you to use again during the Draw Period. Payment amounts can also be flexible—your payment can be as low as the interest-only payment, but you have the ability to pay down the loan in part or in full at any time. Make sure, however, that you understand what might trigger early closeout fees for your HELOC if you pay off your balance early.
- What possible drawbacks should I consider? As interest rates are usually subject to change, you might have a higher payment if interest rates rise. If the thought of a variable interest rate makes you nervous, you may want to consider a fixed-rate loan, such as a Home Equity Loan, which is slightly different from a HELOC.
In addition, if you are using a HELOC to consolidate high interest rate credit cards, discipline is required to avoid a cycle of overspending. Making minimum payments during the draw period may not pay off your line balance. Keep this in mind during the Draw Period, and realize that your payment may increase significantly when it converts to the Repayment Period. Be sure to take into consideration your own spending habits and potential for even greater debt.
Are you interested in learning more about HELOCs?
Our experienced loan originators are here to help you sort out your best options for HELOCs, HELOANs and refinancing your mortgage. We’re here for you 24/7 at 800-860-8821.