The Basics of a Home Equity Line of Credit

If you’re still holding onto your home equity line of credit (HELOC) and the 10^th birthday is rapidly approaching, it’s important that you understand what your options are.

What does every consumer need to know about home equity lines of credit and what occurs when the line expires?

When you have a HELOC, you are signing up for a 2-stage process. In the first stage, you are in the draw period. On average, the draw period lasts for 10 years, but it can be as long as 20. During the draw period, the monthly payments that you make are only applied to the interest on the HELOC.

Once the draw period comes to an end, and you have an expiring HELOC, the amortization period starts. During that period, you will be responsible for making payments toward both the principal and the interest.

The monthly payments will rise a significant amount overnight, so it’s important to know when the home equity line of credit is expiring.

How Drastic Is the Jump?

When we say that the jump is drastic, we are not exaggerating. In this example, we are assuming a 20-year repayment period and only a 3% interest rate.

If your home equity line of credit was $100,000, the payment during the interest-only draw period would be $250. During the second phase of the HELOC, it would jump to $555. Depending on if you have a higher interest rate, that increase could be even steeper.

The good news is that many banks will remind you when your home equity line of credit is about to move into the second phase.

Somewhere between 6-12 months before the formal end of the draw period, most lenders will send out notifications. This is also the time to consider if you want to refinance your HELOC.

Your Options for Refinancing a Home Equity Line of Credit

• Refinance the HELOC. This will give you an entirely new HELOC with a new interest-only draw period. You will still have a line of credit, but you will be responsible for eventually paying off the balance. Many HELOCs are a variable rate, so you can never predict what rates will look like in a year.
• Pay off the HELOC using a home equity loan. Since home equity loans are fixed rate for fixed amounts, the payments will stay consistent for the duration of the loan.
• Refinance the HELOC and your original mortgage into a primary mortgage. When you fold the HELOC into a new primary mortgage, you could benefit from a lower historical mortgage rate.

Understand Your Home Equity Line of Credit with Equity Mortgage

I am experienced in getting homeowners the best possible mortgage product for their situation. Since every client is in a different situation, I encourage you to get in touch and learn how I can help. Contact us today by calling 443-471-4310. I look forward to hearing from you!