Interest (in rate)
A fee charged for borrowing money. Also refers to money that a financial institution may pay individuals for keeping their money in an account there (such as an interest-bearing savings account).
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If you’re considering borrowing from the available Glossary Term: equity in your home, you may wonder about the similarities and differences between a home equity loan and a home equity line of credit. Here’s a quick look at some of the key factors to consider.
A home equity line of credit can be used for one-time expenses, like a kitchen or bath remodel, or those that may occur over a period of time, like ongoing home improvements, tuition, or other emergency expenses.
With a home equity line of credit, you’ll get a line of credit that you can draw from as needed during the permitted draw period, which is generally 10 years. You’re typically allowed to borrow as little or as much as you need, up to your available credit limit. Most lenders will provide you with options to easily access your credit line; for example, checks, online banking, and an access card that functions like a credit or debit card except that your purchases get charged to your home equity line of credit which is secured by your home.
Home equity lines of credit have a Glossary Term: variable interest rate. The rate is based on a financial index plus a margin and will vary with the index. Home equity lines of credit typically carry lower interest rates than home equity loans. 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.
With a home equity line of credit, you may have the option to make monthly payments of interest only during the Glossary Term: draw period (which is generally 10 years), and then you’ll be obligated to pay principal plus interest during the repayment period (usually 15 years). You may also pay all or a portion of the principal, along with interest, during the draw period, usually without penalty. Paying down your principal during the draw period allows you to replenish the amount of available credit you have to borrow against. Regardless of how you decide to make your payments, you’ll only have to pay interest on the principal you’ve withdrawn from your credit line.