HELOC Basics

• A HELOC is one of the two common ways homeowners can borrow funds using the home equity built up in their property. The other is a home equity loan. An equity loan is paid through a lump sum distribution to the homeowner and repaid on an amortized schedule over a repayment period. A HELOC typically offers more flexibility as the homeowner gets a credit line and is able to use the funds as needed during the loan term.
  
  

Draw Period

• During the initial draw period of 10 to 15 years on your HELOC, you can borrow funds on your credit line as needed, up to the established limit. Many HELOCs require only interest payments during the draw period. This makes the monthly cost of using this source of financing relatively low. However, by not paying on the principal balance, you owe more in interest and have less money available to borrower. If you repay some principal each month, you pay down the balance and increase the available amount.
  
  

Amortization

• Once your initial draw period ends, you may have the option to renew the credit line for an additional period, perhaps another 10 years. This gives you more time to draw on the line and pay only interest if you choose. If you prefer not to renew or if the lender does not allow it, your remaining principal balance is amortized for the remainder of the term. For instance, if you have a $40,000 balance left after your draw period, this amount is amortized over 10 years.
  
  

Additional Insights

• HELOCs are a low cost source of financing for homeowners. The flexibility of using funds as needed is a main benefit of HELOCs over the equity loan. Common uses of home equity lines include college tuition, home renovation or repair projects, business start-ups and debt consolidation. HELOCs are not without risks. You are exposing your property to greater risk of foreclosure by giving the lender an additional lien against your property.