How Does a Home Equity Line of Credit Work?
How Does a Home Equity Line of Credit Work?
A home equity line of credit works like a bank credit card which lets you withdraw on a credit line up to a set limit in the initial draw period. You would be able to withdraw money anytime you require within this period, which is usually ten years. As one pays down the principal amount, the line of credit revolves and he or she is able to use it again. However, this flexibility means one could pay considerable interest charges when he or she takes out a variable-rate home equity line of credit and the rates rise.
One can opt for one of the two loan options: one with interest-only payments, and the other with both principal and interest payments. The second option helps a borrower pay off his or her loan more rapidly. Most home equity lines of credit come with variable interest rates, which mean one’s monthly payment can go down or up over the loan’s duration. Some lenders offer fixed-rate loans, but these often have higher initial rates of interest.
After the HELOC draw period, one enters the repayment period, wherein any remaining interest is due and principal balance is due and the rate of interest becomes fixed.
Using a home equity line of credit for a major home improvement project might just be tax-deductible too.
