HOME EQUITY LINE OF CREDIT
The Most Frequently Asked Questions about a Home Equity Line of Credit
Q: What is a Home Equity Line of Credit (HELOC)?
A: A home equity line of credit is a form of revolving credit secured by the equity in your home. It offers a low interest rate that may be tax deductible (please consult your tax advisor).
Q: What is the HELOC terms?
A: Many of the Helocs offered have a set fixed period during which you can borrow money, such as 10 years. At the end of this "draw period," you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period (the "repayment period"), for example, 10 years.
Q: How do you determine the amount I can borrow?
A: The two main factors that determine the amount you can borrow (1) how much available equity you have in your home (current value of your home minus your first mortgage balance and any other liens) and (2) your debt-to-income ratio (total of all monthly payments on outstanding debt divided by your total monthly income).
Q: What will my monthly payment be? Can I make principal payments?
A: During the "draw period" the minimum monthly payment is interest only. For example, if the line of credit loan amount is $20,000 with an interest rate of 10% the monthly payment would be $166.67 ($20,000 X 10% / 12 months). You can elect to make principal payments towards your line of credit in order to pay it off sooner.
Q: How do I access my line of credit?
A: You can take as much of your line as you need at closing. This is known as the initial draw. Then within 7-10 business days after the closing of your loan, you will receive a check book from which you can access your available line.
Q: Can the interest rate on my HELOC change or will it always remain the same?
A: The interest rate is tied to the Wall Street Journal's Prime Rate. If there is an increase or decrease to this rate, your HELOC interest rate will change respectively. This change will occur on the following month's bill. "Fixed Rate" second mortgages are also available.
Q: Are there any restrictions for what I can use my HELOC funds for?
A: Absolutely not! You can use your HELOC for any purpose including: debt consolidation, home improvements, purchase of a car, college tuition, etc. Best of all, the interest you pay may be tax deductible (consult your tax advisor).
Q: How is the daily periodic rate calculated?
A: Take the fully indexed rate and divide it by 360 days.
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