Home Equity Lines of Credit, or HELOCs, are open-ended, revolving loans that allow future advances up to the approved credit limit. Much like credit cards, they offer cash when it is needed with flexible payment options during the draw period. The draw period of a Home Equity Line of Credit is the amount of time the line of credit is open for, usually ten years, after which the balance must be paid.
Advances taken out during this draw period may have small monthly payments in which only minimal amounts are paid toward the principle with the rest of the payment going to accrued interest, or interest only payments may be made. At the end of the draw period, many plans have balloon payments in which the monthly payments will drastically increase to cover the rest of the balance due or the entire balance may be due immediately. There are plans that offer repayment of the Home Equity Line of Credit loan over a fixed period of time after the draw period has ended.
Interest of Home Equity Lines of Credit is usually variable and tied to the Prime Lending Rate, the rate in which most major banks charge their largest and most credit worthy customers. These variable rates usually have a cap to limit how high of an interest rate can be charged and some have limits as to how low the interest rate can get. Variable rates are subject to quarterly adjustment though some plans offer a fixed interest rate. The interest paid on Home Equity Lines of Credit is only paid when the funds are used and is usually tax deductible.
Like Home Equity Loans, Home Equity Lines of Credit have fees that may be charged for taking out the loan. Some plans call for one-time; up front fees while others have annual fees. Plans that offer low monthly payments during the draw period may require a balloon payment at the end of the loan period requiring the entire remaining balance to be paid. Other fees can also apply such as appraisal fee, credit check fee, and closing costs. The Federal Truth in Lending Act protects the borrower by requiring the lender to inform the borrower of all costs and terms when the application is given.
California residence taking out a Home Equity Line of Credit have the option of whether or not to allow outside and affiliate companies to have access to their private financial information. Through the California Financial Information Privacy Act, the lender can only disclose financial information about California residences with other companies if it is mandatory in securing the loan. Any other use of the information is at the borrowers’ discretion.
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