When funds are needed for a sizable purchase or a large expense, a home equity line of credit (HELOC) can provide the ideal answer. A HELOC is basically a line of credit secured by your home. Through it you can get at a loan at a lower interest rate than other types of loans. An additional advantage that comes with a HELOC loan is that the interest is usually tax deductible.
Taking on a HELOC loan is essentially borrowing against the available equity in your home, with your home acting as the collateral for the loan. As you make your payments on the loan, the available credit is replenished. In this sense, a HELOC offers a revolving line of credit against which you can repeatedly borrow as needed. The amount of available credit through your home’s equity is established at the time of closing. You may borrow as little or as much as you need up to that limit during the draw period, which is typically 10 years. When the draw period ends, the loan repayment process begins and may last up to 20 years.
HELOC eligibility depends on the amount of money you owe on your home. If this amount is lower than the value of your home, you should qualify for a loan of up to 85% of your home’s value, less the amount you owe. Typically factors such as credit and employment history, income, and current debt are also considered by the lender.
Variable Interest Rate HELOC
In the case of a variable interest rate HELOC, your monthly minimum payment may change based on interest rate fluctuations and the balance due. The actual rate is calculated using an index (financial indicator used by banks) and a fixed margin. The margin does not change, but the index may move up or down throughout the life of the loan.
Fixed Interest Rate HELOC
In some cases, borrowers may have the option to convert a portion of a variable-rate HELOC loan balance to a fixed rate payment. A fixed interest rate HELOC loan payment offers the advantages of being stable and predictable, offering you protection from rising interest rates.
If you are a home owner, a home equity line of credit may provide a great way to pay for home improvements, repairs, expenses, or consolidate and pay down high-interest rate loan debt. To learn more, contact the Kentucky mortgage experts at First Liberty.