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How does a HELOC work?

A home equity line of credit (HELOC) is a form of revolving credit for which a home is used as collateral. You can use a HELOC to borrow money up to an approved limit, pay down the line, and then reborrow. This is similar in some ways to a credit card. Because it is a line of credit, you make payments only on the amount you actually borrow, not the full amount available. Lenders will set the credit limit of a HELOC based on the amount of equity in a home.  The credit line is set up for a maximum draw, rather than a lump sum fixed amount. Most HELOCs have a draw period and a repayment period. During the draw period, a borrower may only be required to pay interest. During the repayment period, which are longer periods of time, borrowers may principal payments as well.

Benchmark Federal Credit Union’s Ultimate HELOC offers borrowers two payback options. We’ll discuss them further along in this blog. Another benefit of Benchmark’s Ultimate HELOC is a low introductory rate of 1.99% APR* Benchmark enables qualified borrowers to borrow up to 90% of the appraised value of your home on amounts between $10,000 and $250,000. The offer is open to all Benchmark members. Not a member? If you live, work, worship, or attend school in Chester County, PA, you are eligible for membership.

HELOC Interest Rates

HELOC rates are variable rates, which means they may change throughout the life of the loan as the prime rate changes. Because the balance of a HELOC may change from day to day, depending on the amount drawn, interest on a HELOC is calculated daily, rather than monthly. As a HELOC is secured by a home, interest rates are usually lower than other loans and credit cards. When applying for a HELOC, lenders will take into consideration the equity you currently have in your home, your debt to income ratio, and your credit score, among other criteria. HELOCs are a cost-effective way to fund home improvement projects, pay educational costs, make a large purchase, or have access to funds in the event of an emergency.

HELOC Flexibility 

A HELOC enables a borrower to access the money they need when they need it up to a certain limit. This is an option you just don’t get with a lump sum loan. It makes it a great choice for ongoing costs, such as tuition payments or a large home renovation where work will be complete, and payments made over a longer period of time. When using a HELOC to make significant improvements that enhance the value of your home, the interest paid may be tax-deductible***. Consult your tax advisor regarding interest deductibility.

HELOC Repayment Options 

Typically with a HELOC, you are only required to make interest payments during the draw period, which is the amount of time you have to actively draw down on the line. If you do want to pay extra, you can pay on the principal during this time as well. Making principal payments enables you to borrow again on the line as you pay it down. After the draw period ends, you begin a repayment period, where you begin paying back the remaining principal on your HELOC, plus interest.

Benchmark’s Ultimate HELOC provides borrowers with two payment options. This includes a principal plus interest option or an interest-only option. The principal plus interest payment option provides borrowers with a ten year revolving draw period. As the principal is repaid, more becomes available for use. After the 10 year draw period ends, the line of credit reverts to a 15-year repayment term. For the interest-only option, borrowers pay only the interest due monthly during the 5 year draw period, with a $50 minimum payment. This is ideal for borrowers looking to make the lowest possible monthly payment during the 5-year draw. The drawback is once you have reached your credit limit and because you are not making any principal payments, you can’t draw more on the line. After the 5 year draw period ends, the line of credit reverts to a 15-year principal and interest repayment term.

Read more helpful financial articles like this one on our Benchmark Federal Credit Union Blog.

 

*APR = Annual Percentage Rate. Rates are for qualified borrowers and are subject to change without notice. Introductory rate of 1.99% APR is for the first 6 months. At the end of the introductory term, the rate reverts to rate according to credit score at the time of application: as low as Wall Street Journal Prime Rate – .51% for 80% LTV** and Wall Street Journal Prime Rate – .26% for 81-90% LTV**. Floor rate is 3.99% APR. $100 application fee for loans under $25,000. Early termination fee of $250 if HELOC is paid off & closed in the first 12 months.

**LTV = Loan to Value

**Consult your tax advisor

 

 

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