Mechanics

The home equity line of credit is similar to the home equity loan. The primary difference is that the line of credit provides the borrower with a checkbook, instead of one lump-sum check. The borrower can use the home equity credit line checkbook to withdraw funds for any purpose.

Most home equity line of credit will divide the credit line's term into two phases:

  • Revolving
  • Amortized

During the revolving phase, the borrower can withdraw funds from the credit line, until the credit limit is reached. Some lenders may extend this credit limit, especially as the property appreciates.

This revolving stage usually lasts five to 10 years, with seven (7) years being the most common norm. The minimum payments due each month is usually the interest due for that particular month. As such, the HELOC is essentially an interest-only balloon during the revolving state.

If the borrower wishes to reduce the principal balance during this interest-only phase, the borrower would have to increase their payments above the minimum.

When the revolving period is complete, the lender provides the borrower with an option to convert the current balance into a standard fully amortizing loan.

During the amortized period, the home equity credit line is essentially converted into a home equity loan. Most of these loans are usually for 15-year terms, with the monthly payments paying down the principal balance, as well as paying the interest due.

However, some lenders will allow positive borrowers to renew their home equity line of credit by simply refinancing it with a new credit line.

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