What is Home Equity Line of Credit?
A home equity line of credit or HELOC is a revolving line of credit, based on the equity you have built in your home.
How does Home Equity Line of Credit work?
It is very similar to a credit card borrowing limit – the lender fixes the amount up to which you can borrow depending on your home equity. You borrow funds as and when you need up to this limit, and you pay interest on only what you borrow.
The draw period, which is the time during which you can borrow, is usually 5 to 10 years. This is followed by a repayment period of 10 to 20 years when further borrowing is not allowed. This is when you pay off your debt.
Is the interest rate for Home Equity Line of Credit fixed or floating?
HELOC usually has a floating or variable interest rate. However, some lenders let you switch to a fixed rate during the repayment period.
Can I borrow again after I repay?
Yes, you can borrow or draw on the line of credit as needed, pay back, and then borrow again. You can do this for as long as the lender keeps the line of credit open.
What are the benefits of a HELOC?
Since a home equity Line of Credit is secured or backed by your home, it is very easy to qualify for. Plus, you get access to a large amount of money, usually at a low interest rate. The current floating rates as of Aug 2019 are around 5.5%.
Also, although you might have a high borrowing limit, you can borrow only as much as you need, and pay interest only on that amount.
Are there any disadvantages of Home Equity Line of Credit?
Although you can borrow an amount lower than the limit fixed by the lender, it is tempting to borrow more and use the money for short-term expenses like taking a vacation or buying a car. This is not good for building your wealth and net worth.
Also, your home is used as the collateral for a home equity Line of Credit. If you are unable to repay for any reason, the bank can foreclose the loan and sell your house to recover its money.