How a home equity line of credit works!The borrower can elect to withdraw the entire approved amount at closing. Or if he/she uses the line of credit to borrow sums up to the credit limit, during the draw period. This draw period typically runs up to the first 10 years of the loan term. Like using a credit card, with HELOC you repay the outstanding balance, and the amount of available credit is replenished. If you need the money you can borrow against it again and again. You can borrow as much or as little so long as you don’t exceed the agreed upon the ceiling. After 10 years, the HELOC turns from an interest-only payment into a full P & I payment over the next 20 years left of the loan. However, the P & I payment is still amortized over the full 30 years. You pay interest only for the first 10 years. If you elect to pay down the principle in the first 10 years, that's ok too. There are no pre-payment penalties. How do I repay my Home Equity Line of Credit? The HELOC allows you to repay an interest-only payment monthly. Usually, this amount can be limited to the payment of interest. At the end of the draw period, the borrower will have to pay the principal & interest back for the years remaining left. When you qualify for the loan, we must qualify you off of the full P & I payment + the lender adds a small amount for what they call payment shock. Interest rates for HELOCs are most of the time variable and have two components: the index and the margin. The index rate is a market-variable interest rate called the prime rate. The margin is a fixed percent the lender adds on top of the variable base index rate.
What is Prime Rate & how does it affect my home equity line of credit?The prime rate moves with the "fed funds rate”, and has been set at 3 percent above the Federal Funds Target Rate from 1994. The "fed funds rate represents the rate commercial banks pay for short-term borrowing from the Fed. Thus If the fed funds rate changes, the prime rate immediately moves by the same percentage amount + 3. For example, if the fed funds rate goes from 1.5 percent to 2 percent, the prime rate would change from 4.5 percent to 5 percent. The Federal Open Market Committee of the Federal Reserve Board is the body that votes on the level for the fed funds interest rate. This Committee meets every six weeks and this means that the prime rate might also change every six weeks. Historically, the fed funds rate changes in one-quarter of 1 percent increments. This variable rate of interest incorporates some real risk for you if you. Life is sunny if interest rates go down but clouds will cover the blue sky if interest rates go high. And they can go really high and with them your monthly payments. Remember, a home equity line of credit is an adjustable rate mortgage. A legally required tool that will help you is a lifetime rate cap that puts a ceiling to how much rates can change over the life of the home equity line of credit.
Can I convert my HELOC to a fixed rate mortgage?Some lenders give the borrower the possibility to convert a portion of the outstanding variable-rate balance to a fixed rate. Thus you will have more predictability of monthly payments. There are risks with HELOC loans as with all loans with adjustable interest rates but you will also have lots of advantages. Being able to manage your cash flow efficiently is optimum. HELOCs are attractive because of their flexibility in borrowing and repaying the loan and because there is a tax incentive not present for other borrowing methods, and we can mention here credit cards. Failure to repay your HELOC loan may result in foreclosure.
Qualification criteriaThe specific qualification criteria for HELOCs is the available equity in your home. Meaning the value of your home has to be higher than the amount you owe on it. Most lenders will allow you to borrow up to 85% of the value of your home. In contrast, this home equity line offers up to 89.9% of the home's equity for a primary occupancy only. All the other qualification criteria are the same as for other loans. For example, credit score, credit history income, other debts, employment history, etc. all count. Still not sure … If you don’t know what product is best for you to contact Casey Moseman below. Being here in Las Vegas and can explain the PROs and CONs, if any, of each product. I can also help you calculate the highest payments you may have over the lifetime of your HELOC. Find out the difference between a home equity line of credit and when you hear a home equity loan. Above all, there are opportunities for consolidating debt with a home equity line of credit. Most noteworthy, the key for you is having options...
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