During this time, the borrower can drawdown funds, repay and redraw again as many times as they wish, only paying interest on their outstanding balance.
During the “draw period”, the customer can use their HELOC like a revolving facility.
The term of a HELOC is split in two distinct periods. Differences from conventional loans Ī HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. As a result, lenders generally require that the borrower maintain a certain level of equity in the home as a condition of providing a home equity line, usually a minimum of 15-20%. However, because the collateral of a HELOC is the home, failure to repay the loan or meet loan requirements may result in foreclosure. This is because they are secured against a borrower’s home and thus seen as low-risk financial products. HELOCs are usually offered at attractive interest rates. However, within the lending industry itself, HELOCs are categorized as a second mortgage. Furthermore, their popularity may also stem from having a better image than a " second mortgage", a term which can more directly imply an undesirable level of debt. Ī reason for the popularity of HELOCs is their flexibility, both in terms of borrowing and repaying. Because a home often is a consumer's most valuable asset, many homeowners use their HELOC for major purchases or projects, such as home improvements, education, property investment or medical bills, and choose not to use them for day-to-day expenses. ( October 2022) ( Learn how and when to remove this template message)Ī home equity line of credit, or HELOC ( /ˈhiːˌlɒk/ HEE-lok), is a revolving type of secured loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's property (akin to a second mortgage).
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