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Home Equity Lines of Credit

A Home Equity Line of Credit is a revolving line of credit that is fully secured by the equity in your home. Home Equity Lines are almost always adjustable rates, usually they are priced with an index that is floating over "Prime". Prime is also referred to as Wall Street Prime, it is defined as the interest rate a bank will charge its most credit worthy borrowers, usually very prominent and stable corporate clients. 

A normal home equity line would be Prime + 1, if Prime was currently set at 4% then the rate in this instance would be 5%. The loan balance can revolve, as you pay down principle, your payment will go down. As you were to borrow against the line, your payment would increase. 

Draw Period and Payback Period

In most circumstances, you will only have to pay interest during the draw period, once the draw period was over, the loan would begin to amortize over previously specified Home Equity Line of Credit period of time. 

Normal Draw and Payback terms would be: 10 year draw period and 15 year payback or amortization period. During the draw period you can draw and pay down the balance as much as you wish. During the payback period, principle and interest will be due on a monthly basis. Customarily the loan will float and adjust to Prime during both the draw and payback periods. 

Typically a Home Equity Line is a second mortgage but many people decide to use a "HELOC" as a first mortgage as well. Self Employed people who make most of their money in a certain time of year will occasionally use a Home Equity Line as a cash flow management tool. 

A HOLOC gives you control over your finances:

  • The interest is typically be tax-deductible interest
  • Typically a lower rate than other types of loans, but, not always
  • You have continuous access to the money during the draw period that you can pay back down whenever you wish

Many use HELOCs for these purposes:

  • Home improvements
  • Student loans
  • Unexpected expenses
  • Paying off higher rate credit card balances

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