Find out if Home Equity Line of Credit is the right loan for you
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Home Equity Line of Credit - HELOC
Usually referred to as a HELOC, is a revolving line of credit that is secured by residential property and used to access the existing equity in the property.
It is usually a 2nd mortgage as it is obtained in addition to an existing mortgage when the borrower does not want to refinance or payoff an existing mortgage. The borrower can draw (borrow) any amount up to the credit limit as funds are needed. Typically, the funds are accessed via check writing, but sometimes the creditor issues a credit card to use to draw funds. The borrower is only charged interest on the amount of funds being used, as opposed to the total credit limit. This is beneficial as funds can be borrowed and repaid as desired to manage interest expense.
Home Equity Line of Credit's(HELOC's) are variable rate loans that are tied to short-term interest rates, such as the Prime Rate, and rate can change daily as short-term rates move up or down, but is usually is set monthly. The actual interest rate being charged is typically the Prime Rate plus a fixed margin of 1% or 2%. The actual rate depends on the borrower’s qualifications, and underlying terms of the HELOC. In some cases, high credit worthy borrowers with strong qualification and good collateral, can obtain rates below the Prime rate.
The term, or length, of the Home Equity Line of Credit can be between 10 and 30 years, and will have a draw period less than the total term. During the draw period, the borrower can borrow funds up to the credit limit as needed, and repay as desired. After the draw period, no additional funds can be borrowed and the balance must be paid off over the remaining term. For example, if the term of the HELOC is 15 years, the draw period will typically be the first 10 years. During the draw period, required monthly payments are usually interest only payments based upon the outstanding balance and current interest rate. The borrower can pay more than the monthly interest to reduce the balance. HELOC’s require that the balance is paid off in full by the end of the term. Depending on the creditor’s HELOC terms, this will be set one of two ways. Most common is a balloon payment which means that if the balance is not paid off by the end of the term, the borrower’s final payment will be equal to the outstanding balance and interest due. Alternatively, some creditors will amortize the balance over the remaining term (after the draw period) and require a monthly principal and interest payment. The monthly payments will be the amount needed to pay off the balance over the remaining term at the current interest rate, and the payment will adjust as interest rates change.
Home Renovation projects can be financed and provide a great return on your investment. Not only you could be adding equity to your home but you will have many options to remodel your home. Whether it is home equity line of credit (HELOC), fha 203k loan, cash outs or personal loans. Check the appropriate home remodel loans for your situation and let Kukun match you with the right loan and right lender.
Pros
- Flexible- access funds when needed, repay as desired, and only pay for portion of funds used.
- Lower Interest only payments during draw period.
- Easier, faster approval process than conventional and government loans.
- Low upfront closing costs and fees.
- Rates lower than other forms of credit.
- Allows borrower to keep existing 1st mortgage.
- Interest maybe tax deductible (seek advice of tax professional).
- No prepayment/repayment penalties.
- Loans are readily available from many sources in the market (i.e. Banks, Mortgage Companies, Savings & Loans, Credit Unions).
Cons
- Requires property to have reasonable amount of equity – existing loans plus Home Equity Line of Credits typically limited to 80% of existing value of property.
- Variable interest rate tied to short term interest which means the rate being charged, and therefore the payment, will change during the loan.
- Borrower needs good credit and ability to repay loan to qualify.
- Requires borrower to complete loan application, provide income and asset documentation and get an appraisal.
- Requires principal and interest payments after draw period, and will have balloon payment at end of term if balance is not paid off.