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What is a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a line of credit that is secured by a primary residence. This is a revolving line of credit that can be used for large expenses, to consolidate debt, or for any short-term need. The funds are used as they are needed and you only pay interest on the amount that is borrowed. As the line is paid back that amount of available credit is replenished and can be used again for the entire ‘draw period’ – similar to a credit card. The draw period is typically 10 years and at the end of the draw period you will have a set repayment period.
A home equity line of credit will have a variable interest rate based on an index and margin. The index that we use is Prime Rate and the margin is based on credit approval. For example…if the interest rate is Prime + 1.00 and prime rate is equal to 7.0% the actualized rate would be 8.0% until the prime rate fluctuates again. Any time that the prime rate changes the actualized rate on the line of credit will change.
What is a Home Equity Loan?
A home equity loan can be either a 1st or 2nd mortgage with a fixed rate, fixed term, and fixed payment amount – this loan is secured by a primary residence. With this type of loan you receive all of the funds in a lump sum after closing and then make regular monthly payments for the approved term.
Home equity loan rates are fixed and are based on the length of the loan, the dollar amount borrowed, and the borrower’s credit score.
When to take out a Home Equity Loan or a Home Equity Line of Credit?
If a borrower is going to be using a large amount of funds all at once then a home equity loan may be the better option. This option allows for a fixed rate, payment, and term.
If a borrower is looking for more flexibility and wants to have access to funds but may not need to use all of them then the line of credit may be the better option.
To know which option is best for a borrower they need to take the time to go over their situation and needs with a licensed loan officer than can help them find the right product. Our loan officers are available during business hours, 8:30a.m. – 6:00p.m. Monday-Friday and 9:00a.m. – 1:00 p.m. Saturdays. If you have any questions, give them a call at 216-478-0067!
Mortgage Loan Officer, AVPOC Federal Credit Union
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