A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.
HELOCʼs have extremely flexible terms and is an excellent financial tool for homeownerʼs with a large equity position in their home. HELOCʼs typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish.
Due to the flexible nature of the draws HELOCʼs have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOCʼs can vary from -.50%-3.00%.
The margin is determined by the borrowerʼs credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOCʼs do have an annual service fee charged for the maintenance of the account.