HELOC – How to borrow and repay a line of credit

You can take out Home Equity Lines of Credit if you are in urgent need of money. However, you need to have sufficient home equity to obtain such a loan. Usually, homeowners obtain HELOCs for major purposes, such as, making home improvements, for child’s education or to meet emergency financial situations rather than using a HELOC for everyday expenses.

What is meant by Home Equity Line of Credit?

Home Equity Line of Credit (HELOC) is actually a type of revolving credit wherein your home serves as the security for the loan. When you apply for a HELOC, you actually get approval for a definite amount of credit. Usually, the lenders take a definite percent of the home appraised value and subtract the outstanding mortgage balance from it so as to set the credit limit of a HELOC. The lenders also consider your ability to repay the loan while deciding the credit limit of a HELOC.

How long can you borrow from a HELOC?

In most cases, the lenders set a fixed time period for Home Equity Lines of Credit. Within this time period, you can borrow as and when required until you exceed the available credit limit on your HELOC. The draw period may vary from 5-10 years, after which, you need to renew your credit line in order to borrow money. In addition to this, some HELOC plans may require you to withdraw a minimum amount every time you need to borrow. Your plan may also require you to keep a minimum outstanding balance in your HELOC account.

How should you repay a HELOC?

Your lender may offer a choice of payment options when you apply for Home equity Lines of Credit. You may opt for making a minimum monthly payment that includes the interest along with a portion of the principal amount. You may also go for a HELOC plan wherein you need to pay only the monthly interest during the loan term and pay back the principal amount in full at the end of the borrowing period. You should know that the interest on a HELOC is calculated on the borrowed amount and not on your available credit limit.

However, regardless of the payment arrangements you choose during the life of a HELOC plan, you may have to pay a lump sum amount at the end of the plan. So, you should be financially prepared to make a balloon payment at the end of the plan. Otherwise, you may lose your collateral (your home), if you’re unable to make the required payment at the end of the loan term.

So, it is advisable that before taking out Home Equity Lines of Credit, assess your financial condition and decide how to pay back the amount borrowed. You can manage your finances accordingly to repay the HELOC right on time.

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