Northlawn Financial, Inc.

 

A Home Equity Line of Credit (or HELOC) is a secure line of credit using the available equity in the property owned as collateral. It is a loan set up as a line of credit for some maximum draw, rather than for a fixed dollar amount.

HELOC's are convenient for funding intermittent needs, such as paying off credit cards, making home improvements, or paying college tuition. You draw and pay interest on only what you need.
Most HELOC's are second mortgages. An increasing number, however, are first mortgages, as yours would be if you used it to refinance your existing first mortgage.

HELOC's have a draw period, during which the borrower can use the line, and a repayment period during which it must be repaid. Draw periods are usually 5 to 10 years, during which the borrower is only required to pay interest. Repayment periods are usually 10 to 20 years, during which the borrower must make payments to principal equal to the balance at the end of the draw period divided by the number of months in the repayment period. Some HELOC's, however, require that the entire balance be repaid at the end of the draw period, so the borrower must refinance at that point.

All HELOC's are Adjustable Rate Mortgages (ARM), and are tied to the Prime Rate set by the Federal Reserve, rather than the indices of standard ARM's.

In addition, most standard ARM's have rate adjustment caps, which limit the size of any rate change. HELOC's have no adjustment caps, and the maximum rate is 18% except in North Carolina, where it is 16%.

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