How HELOCs work
PREPARE FOR UP-FRONT COSTS
Some lenders waive some or all of the up-front
costs for a HELOC. Others may charge fees. For
example, you might get charged:
• A fee for a property appraisal, which is a formal
estimate of the value of your home
• An application fee, which might not be
refunded if you are turned down
• Closing costs, including fees for attorneys,
title search, mortgage preparation and ling,
property and title insurance, and taxes
PULL MONEY FROM YOUR LINE OF CREDIT
Once approved for a HELOC, you can generally
spend up to your credit limit whenever you want.
When your line of credit is open for spending, you
are in the you are in the borrowing period, also
called the draw period. Typically, you use special
checks or a credit card to draw on your line. Some
plans require you to borrow a minimum amount
each time (for example, $300) or keep a minimum
amount outstanding. Some plans require you to
take an initial amount when the credit line is set up.
MAKE REPAYMENTS DURING THE “DRAW
PERIOD”
Some plans set a minimum monthly payment that
includes a portion of the principal (the amount you
borrow) plus accrued interest. The portion of your
payment that goes toward principal typically does
not repay the principal by the end of the term.
Other plans may allow payment of the interest only,
during the draw period, which means that you pay
nothing toward the principal.
If your plan has a variable interest rate, your
monthly payments may change even if you don’t
draw more money.
ENTER THE “REPAYMENT PERIOD”
Whatever your payment arrangements during the
draw period—whether you pay some, a little, or
none of the principal amount of the loan—when the
draw period ends you enter a repayment period.
Your lender may set a schedule so that you repay
the full amount, often over ten or 15 years.
Or, you may have to pay the entire balance owed,
all at once, which might be a large amount called
a balloon payment. You must be prepared to
make this balloon payment by renancing it with
the lender, getting a loan from another lender, or
some other means. If you are unable to pay the
balloon payment in full, you could lose your home.
RENEW OR CLOSE OUT THE LINE OF CREDIT
At the end of the repayment period, your lender
might encourage you to leave the line of credit
open. This way you don’t have to go through the
cost and expense of a new loan, if you expect to
borrow again. Be sure you understand if annual
maintenance fees or other fees apply, even if you
are not actively using the credit line.
TIP
If you sell your home, you are generally required
to pay off your HELOC in full immediately. If you
are likely to sell your home in the near future,
consider whether or not to pay the up-front costs
of setting up a line of credit.
6 HOME EQUITY LINES OF CREDIT HOW HELOCS WORK 7