Home Equity Line of Credit - Home Equity Line of Credit or most commonly reffered to as "HELOC", refers to a loan in which the lender agrees to lend a maximum amount within an agreed time period.

A Home Equity Line of Credit in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you may borrow up to.

A draw period usually lasts anywhere from 5 to 10 years and allows you to borrow HELOC funds whenever you feel the need; you’re only required to pay back the amount you use plus any interest.

Some HELOCS have minimum draws at close. This means that you will have to take a minimum cash out amount at close. Be sure to ask your mortgage broker if your HELOC has a minimum draw at close.

Most Heloc's, Home Equity Lines Of Credit, have an adjustable interest rate that is tied to a certain index. Some examples of indexes are: Libor, Prime, Cofi, MTA, etc... The rate will usually be index + the margin. The margin is usually based on the loan scenario, your credit scores, your LTV (loan to value), and equity line amount. The better your situation and the better the loan looks, usually the lower your margin will be. An example might be: if you were only borrowing a 30k home equity line, you have a home that is worth $300,000, you only owe 100k on your first loan, and your credit score is over 750 you may qualify for a loan that is prime + 0 for the margin. This means that your loan interest rate will always be equal to whatever Prime is. Now for the same situation, but with a 650 credit score and a 200,000 balance on your first loan, your credit is worse and your loan to value is significantly higher, so you will probably have a higher margin on your equity line: something like prime + 3.5% for your margin. Therefore you interest rate will always move up or down with Prime plus the 3.5%.

Many homeowners actually originate a home equity line of credit even when they have no immmediate need for money. The beauty of this program is that you do not pay any interest on the equity line until you actually draw the funds. Having the HELOC can serve as a savings account of sorts or "rainy day" money if you will. It allows homeowners quick access to cash should ever a need arise.

An advantage to opening a home equity line of credit even when not in need is to lock in the ability to tap into the equity built in the house. If the value of the home should decline, rather than losing financial power due to shrinking equity in the house, the homeowner would still have the full financial power to use the line of credit, which was opened when the home value was higher.

There are two types of home equity loans: a fixed rate loan, or an adjustable rate line of credit.

The fixed rate home equity loan is attractive when you need the money immediately. This type of loan gives you protection against rising interest rates. They typically take the form of a fifteen year fixed rate, or a thirty year amortization with any outstanding balance due after fifteen years.

A home equity line of credit, on the other hand, is attractive if you do not need the money right away. You only pay interest on the amount outstanding. Therefore, if there is no balance, there are no payments. When there is a balance, the lender typically requires that you only pay the interest due. The lenders typically let you draw on the line for up to twenty years, and then require you to pay back principal after the draw period has expired.

No Closing Cost Home Equity Line of Credit - When looking for a home equity line of credit you will have many options to choose from. Most notably you will have the option of a no fee home equity line of credit. The lender will pay all fees associated with he closing of your HELOC for an increase in the margin charged over prime.

Often, you will have the choice of no closing costs or to pay these costs. Ask your mortgage professional to do a comparison of the two for you. Closing costs for equity loans are usually quite low and, depending upon how long you will have the loan, the lower interest rate you pay may offset the closing costs.

When choosing your line of credit also be sure to know what your rate will be after the initial teaser rate if there is one. Often times these lines of credits have a a short term teaser rate.

The monthly payment on a HELOC is based upon the outstanding balance, not the credit limit. Advantage - you only pay for it if you use it!

A no closing cost HELOC is always a good idea to have. It costs you no money to take out, and it gives you emergency money for any incidentals for the homme or unforeseen costs that you may have.

Many Equity Lines of Credit, and especially no cost home equity lines of credit, will still have an annual fee. Most of the time the annual fee is waived for the first year and then each anniversary date of when you obtained the loan you will have a annual fee assessed. This fee is usually around $50, give or take a little, but it just depends on the actual lender.

Many no cost HELOCs are also not available to borrowers without platinum level credit scores.

++