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Home Equity Line of Credit

A  home equity line of credit (HELOC) is a revolving credit line. A HELOC allows the borrower to take out money against the credit line up to a preset limit, make payments, and then take money out again.

With a home equity loan, the borrower receives the loan proceeds all at once, while a HELOC allows a borrower to tap into the line as needed. The line of credit remains open until its term ends. Because the amount borrowed can change, the borrower’s minimum payments can also change, depending on the credit line’s usage.

Loan collateral and terms

Like an equity loan, home equity lines of credit are secured by the equity in your home. Although a HELOC shares similar characteristics with a credit card because both are revolving credit lines, a HELOC is secured by an asset (your house), while credit cards are unsecured. In other words, if you stop making your payments on the HELOC, sending you into default, you could lose your home. MSFCU offers up to 100% of the equity in your home. Your home’s equity is determined by the value of your home minus the remaining mortgage. You can find your home’s value from a recent appraisal. Sites such as Zillow can be unreliable so it’s better to get an actual appraisal which we can help with also.

A HELOC has a variable interest rate, meaning the rate can increase or decrease over the years. As a result, the minimum payment can increase as rates rise. However, some lenders offer a fixed rate of interest for home equity lines of credit. Also, the rate offered by the lender—just as with a home equity loan—depends on your creditworthiness and the amount you’re borrowing.

Draw and repayment periods

HELOC terms have two parts. The first is a draw period, while the second is a repayment period. The draw period, during which you can withdraw funds, might last 10 years, and the repayment period might last another 20 years, making the HELOC a 30-year loan. When the draw period ends, you cannot borrow any more money.

During the HELOC’s draw period, you still have to make payments, which are typically interest-only. As a result, the payments during the draw period tend to be small. However, the payments become substantially higher over the course of the repayment period because the principal amount borrowed is now included in the payment schedule along with the interest.

It’s important to note that the transition from interest-only payments to full, principal-and-interest.