What is a Home Equity Line of Credit (HELOC)?
A home equity line of credit, or HELOC, is a form of revolving credit where your home serves as collateral. A HELOC lets you borrow up to a certain amount which is based on the available equity in your home. According to the Federal Reserve, HELOC agreements often include a time limit. During that time, you can withdraw money. But what happens when the time limit is over? The bank decides whether to renew the line of credit or not. In case the bank decides to not renew the line of credit then it may call in the loan and ask you to pay an upfront payment of the total amount, or freeze future loans until you have paid off the entire amount.
What is the Interest Rate on a HELOC?
HELOC has a variable interest rate that keeps on changing over the life of the loan. The rates are composed of two parts: publicly available index and a margin. Most HELOCs use the Prime Rate as their index. The index is dependent on economic forces. Most lenders add a margin, may be 2 percentage points, to the index value.
How to Shop for a HELOC?
The most important factor is the margin. This is the amount that is added onto the prime rate. The amount the lender will add as a margin is established at the time of loan approval and it stays the same throughout the entire loan period. Also, beware of low “teaser” rates that may suddenly change after a brief introductory period or be accompanied by special fees. Don’t opt for a HELOC where you have to pay fees to the lender when the HELOC closes. In addition, there are some additional HELOC charges that you should factor in. These include an annual fee, and a cancellation fee which is usually waived if the account stays open for 3 years.
How Much Money Can You Borrow on a HELOC?
You may borrow up to 80 to 90 % of the equity in your home. Here’s an an example: If the appraised value of your home is $200,000, your first mortgage balance is $80,000 and your equity is $120,000. If you opt for a 90% HELOC, then you can apply for a maximum credit line of $108,000.