Home Equity Line of Credit is abbreviated as HELOC and refers to a revolving credit account in which the lender agrees to lend a maximum amount rather than just a set dollar amount in the form of a lump sum like a home equity loan within a preset period of time. When the life span of a line of credit has expired everything must be paid off including the principal along with accumulated interest. HELOC is sometimes referred to as second mortgage, because it's secured by your property.
The borrower uses the line of credit to withdraw funds that can be totaled up to the amount of the loan. In that respect, HELOC resembles a credit card as the borrower is assigned a specified credit limit that he may borrow up to. The draw period usually spans from 5 to 25 years during which the borrower is entitled to use the available HELOC funds according to his needs.
The HELOC borrower has the ability to repay the withdrawn funds in full or partially within the draw period or pay back the full principal amount borrowed at the end of the period along with any compounded interest accumulated. The minimum payments for a HELOC are typically interest-only, which if followed each month will lead to a large balloon payment due on the maturity date. Frequently, many borrowers choose to repay the HELOC amount according to a loan amortization schedule. This repayment flexibility provided to the HELOC borrower makes this form of financing very popular.
HELOC differs from conventional loans in that the interest rate on a home equity line of credit is variable and depends on a widely followed interest index such as the Wall Street Journal Prime Rate which moves in lock step with the fed funds rate. This means that HELOC interest rates change over time. Interest rates have been currently in a rate-rising mode and this is pushing rates on home equity lines of credit higher for both new and existing borrowers.
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