In a HELOC1, the value of a house provides the collateral for a line of credit. The lines of credit generally have fixed terms, and derive their value from a formulation of a specified percentage of a home's appraised value minus the balance still outstanding on the mortgage. Every lender and particular HELOC offering is different, so the Consumer Financial Protection Bureau (CFPB) recommends shopping around and looking for a loan that fits a particular borrower's needs.
The government agency noted that when setting up a HELOC, homeowners typically have to pay an appraisal fee, application fee and potentially a percentage point of the credit limit up front. As with normal mortgages, there are closing costs associated with paying the attorneys and other professionals handling the case. There are also fees such as membership or maintenance charges, as well as potential transactional fees.
In some HELOCs, borrowers can make payments that only count toward interest, rather than the principal borrowed. In those cases, the principal will be due at the end of the payment plan. In other cases, the repayment plan does anticipate paying off the balance of the loan. Some HELOCs have variable interest rates, which can fluctuate from month to month.
Selling a home tends to mean paying off any HELOCs drawn on equity in that property right away. Homeowners who are planning to move on from a current home therefore have less incentive to take out a line of credit than those who are settling down for a long time to come.
HELOC on a Second Home: What You Need to Know
One use of a HELOC involves taking out another loan during the homebuying or refinancing process to make a high-value home more affordable. The second loan, using a high percentage of the home's value as collateral, offsets the costs of the house, and may represent a way to manage lower payments overall, removing the need for extra mortgage insurance.
Flexible monthly repayment schedules enable borrowers to pay off the loan in a way that makes sense for their unique circumstances. Extra principal payments can go towards paying the HELOC balance and lowering overall payments.
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SOURCE
CFPB
Disclaimer:
1This HELOC is an open-end line of credit, available on owner occupied properties, where 75% of the approved full credit limit (minus the origination fees) will be drawn at the time of closing. Additional draws may be available after a 90-day period within the first 3 years not to exceed the available credit limit. Actual rates available to you may vary based on several factors including your credit score and combined loan-to-value. Loan amounts range from $50,000 to $350,000. We may determine home value and resulting equity through independent data sources and automated valuation models. An appraisal may also be required. Only available for eligible borrowers and property types. Not all applicants will be approved, pre-approval is based on data you have provided and certain assumptions that must be verified and subject to underwriting approval. Not available in all states or territories. Contact Newrez for more information.
