The amount of money borrowed on a loan.
The amount of money borrowed on a loan.
An increase in the value of property over time. Important factors in a home’s appreciation are its location and condition, and the selling price of similar homes in the area. Appreciation increases the amount of equity, which may also increase the amount you can borrow for a home equity loan or line of credit.
The difference between the fair market value (appraised value) of your home and your outstanding mortgage balances and other liens.
An asset, such as a car or a home, used for securing the repayment of a loan. The borrower risks losing the asset if the loan is not repaid.
A number that rates the quality of an individual’s credit. Credit reporting agencies calculate this number, often with the assistance of computer systems, as part of the process of assigning rates and terms to the loans they make. The number helps predict the relative likelihood that a person will repay a credit obligation, such as a mortgage loan. In general, the higher your credit score, the more likely you are to be approved for and to pay a lower interest rate on a loan.
The minimum amount you will need to pay each month (does not include any payments for the Fixed-Rate Loan Payment Option). The payment amount includes both principal and interest (minimum of $100). The monthly required payment is based on your outstanding loan balance and current interest rate (interest rates can increase or decrease), and may vary each month. In general, this payment is intended to repay your loan balance with principal and interest installments over the remaining loan term, based on the balance and rate information at the time of each monthly calculation.
You may have the option to borrow against a portion of the available Glossary Term: equity in your home if you own your home outright, or if the remaining Glossary Term: principal you owe on your home is less than its current value. For example, if you’ve been paying down the principal balance on your mortgage or the value of your home Glossary Term: appreciates, you may be able to tap into some of your accumulated equity. Two popular options for doing this are taking out a home equity line of credit or a home equity loan.Here, we’ll talk about home equity lines of credit (also known as HELOCs).
Home equity lines of credit are often used to consolidate higher-interest rate debt on other loansFootnote1 (such as credit cards) or to pay for home improvement projects, including those intended to increase the value of your home.
Here are some basic things to know about home equity lines of credit:
Qualifying. In order to qualify for a home equity line of credit, you must have available equity in your home. In other words, the amount you owe on your home must be less than the value of your home. Most lenders will allow you to borrow up to 85% of the value of your home minus the amount you owe. Your lender will also typically look at your Glossary Term: credit score and history, employment history, monthly income, and monthly debts, just like they did when you first got your mortgage.
The index. A financial indicator used by banks to set rates on many consumer loan products. Most banks use The Wall Street Journal Prime Rate. The rate on your home equity line of credit is calculated from both the index and the margin.
The margin. The margin is the amount added to the index, such as The Wall Street Journal Prime Rate, to determine the interest rate for your home equity line of credit. The rate on your home equity line of credit is calculated from both the index and the margin.
The limit. Your lender will calculate your line of credit limit. Here is an example of the calculation:
Assuming the lender allows a maximum credit limit of up to 85% of your home’s value and your home appraises for $300,000, if you owe $150,000 on your current mortgage you may qualify for a credit line amount of up to $105,000. ($300,000 x 85% = $255,000 - $150,000 = $105,000)
The draw period. The “draw period,” or borrow period, is the period of time when you withdraw your home equity line of credit (HELOC) funds. Your draw period will vary depending on your terms, but typically it will be up to 10 years. You can request convenience checks or a debit card to access your funds. At Bank of America, Online Banking is another helpful way to access your HELOC, allowing you to easily transfer funds to your checking account.
As you withdraw from your HELOC, you’ll receive a monthly bill with Glossary Term: variable-rate monthly minimum payments that include principal and interest. Payments may change based on balance and interest rate fluctuations, or if additional principal payments are made. It’s essential to make your payments on time, and highly advisable to pay more than the minimum, so that you’re paying down additional principal. This will help you save on the interest you’re charged and help you reduce your overall debt more quickly.
The interest. You will be charged interest for any money you borrow against your credit line. Because home equity lines of credit have variable interest rates, your interest rate may vary from month to month. Since it is technically a home loan, the interest paid on a home equity line of credit is usually tax deductible, so you could potentially save on the interest you pay (everyone’s situation is different, so you should talk to your tax advisor regarding interest deductibility for your personal situation). Be aware that lenders have the right to modify your credit line at their discretion by decreasing the amount of funds available. In such cases, they are obliged to inform their customers of these changes to their credit limits. Some home equity lines of credit have an option during the loan term to convert all or a portion of the outstanding variable rate balance to a fixed rate. Bank of America home equity lines of credit include this Fixed-Rate Loan Option.
The repayment period. Home equity lines of credit (HELOCs) have an “end of draw” date when you are no longer able to withdraw funds. After the draw period ends, the repayment period begins, which is typically 20 years. During the repayment period, you will continue to make the monthly principal and interest payments needed to fully pay off the HELOC by the end of the repayment period.
While many lenders offer the same features in their home equity lines of credit, some features will vary. Comparing these points as you shop could make a difference in your payments:
So before you get a home equity line of credit, consider things like whether a variable rate suits your needs, how much you think you’ll need to borrow over what period of time, and whether you’ll be able to make the payments in full and on time in order to maintain your credit rating and keep your homeownership secure. Since your house is used as collateral for your credit line, it’s important not to fall behind in your payments and put your home at risk.
When borrowing from a home equity line, mortgage, credit card or any other credit product, it’s important to borrow only the amount that you can comfortably afford.