Home Equity Line of Credit (HELOC)

A HELOC, or Home Equity Line of Credit, is a secured line of credit often used to pull equity out of a home. Also known as a second mortgage, there are many times when HELOCs are advantageous. The most common uses for a HELOC are for home improvements or to cover major expenses like funding a college education or paying hefty medical bills. Although, there is normally a limit on how much you can pull out based upon the current state of the market, your credit score, and the type of property. HELOCs can also be used on the front end, as part of your down payment when purchasing a home. The term “80-10-10” refers to 80% loan to value first mortgage, a 10% HELOC, and 10% down payment. First becoming common in the early 2000s, this method of buying is making a comeback. HELOCs normally have a draw period, or a time when you can take money out and put money back in, using this as a revolving line of credit. It can be from 5-15 years, and during this time most lenders typically require interest-only payments. Once the draw period has ended, the repayment period begins, requiring you to pay the principal every month for the remaining payments. Interest rates on HELOCs are based on an Index plus a Margin. The Index is normally the Wall Street Journal published Prime Offer Rate. The Margin is set based on your loan-to-value ratio and credit score. Rates fluctuate month-to-month based on the published index value.
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