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What is a home equity line of credit?


Date: Jan 20, 2023


A home equity line of credit (HELOC) is a loan secured by home equity.

A home equity line of credit (HELOC) is a loan secured by home equity. This means that HELOCs typically have much lower rates compared to unsecured loans such as credit cards and personal loans.  

A HELOC is a second mortgage on your home that allows homeowners to borrow money against the equity they have built up in their home after paying down their mortgage. The homeowner is able to tap this equity for a low interest rate that is variable based on the prime rate. Homeowners can use HELOC funds for a variety of purposes including debt consolidation, home renovation, and large ticket items.  

To qualify for a HELOC, you will need to have equity in your home and a good credit score. The amount of equity you have in your home will determine the maximum amount you can borrow against. The interest rate on your HELOC will be lower if you have a higher credit score.  

There are some advantages and disadvantages of using a HELOC that you should be aware of before taking one out. Some advantages include the fact that HELOCs offer homeowners a low-interest way to borrow money. They can also be used for a variety of purposes including debt consolidation, home renovation, and large ticket items.  

Some disadvantages of using a HELOC include the fact that they are a form of debt and can increase your monthly payments if not used wisely. They also typically have variable interest rates which means your monthly payment could go up or down depending on the prime rate. However, there are HELOCs that allow you to convert the balance to a fixed rate or take a fixed rate draw.  

Typically, a homeowner must qualify for a HELOC based on reliable income, good credit, qualifying amount of equity in your home, responsible payment history, and other factors.  

The main factors impacting a HELOC are the draw period and repayment period. The first phase, called the draw period, is when your line of credit is open and available for use. During this period, you will be allowed to borrow from your line of credit as needed, making minimum payments or interest-only payments on the amount you have borrowed.  

Once you reach the end of your draw period, you will no longer have access to the HELOC funds and will have to start making full monthly payments that cover both the principal and interest. This is the repayment period.  

The repayment period can last anywhere from five to 20 years, or even longer in some cases. Some HELOCs have a “balloon payment” at the end of the loan, which is a lump sum payment for the remaining balance that is due.  

Other HELOCs will convert to a fixed-rate loan once the draw period ends. This means your interest rate will be locked in and your monthly payments will become fixed, making budgeting for your payments easier.  

It’s also important to consider how you will use the funds and whether you will be able to make the monthly payments during the repayment period. HELOCs can be a great tool for homeowners who need to borrow money, but it’s important to understand how they work before taking one out.

Equal Housing OpportunityHitch Inc. NMLS 2383367
1. Qualified applicants may borrow up to 95% of their home’s value. This does not apply to investment properties.2. HELOCs have a 10-year draw period. During the draw period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) the total of all accrued finance charges and other charges for the monthly billing cycle. During the draw period, the monthly minimum payments may not reduce the outstanding principal balance. During the repayment period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) 1/240th of the outstanding balance at the end of the draw period, plus all accrued finance charges and other fees, charges, and costs. The lender will calculate this amount by taking the outstanding Account Balance on the last day of the draw period and dividing it by 240 months and then adding any finance charge that accrues but remains unpaid during the monthly billing cycle plus any other fees, charges and costs to the fixed principal payment that is due. During the repayment period, the monthly minimum payments may not, to the extent permitted by law, fully repay the principal balance outstanding on the HELOC. At the end of the repayment period, the borrower must pay any remaining outstanding balance in one full payment.3. The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Our borrowers get their cash on average in 26 days. The time period calculation to get cash is based on the first 6 months of 2022 loan funding's, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications. Closing costs can vary from 3.0 - 5.0%. An appraisal may be required to be completed on the property in some instances. Not all borrowers will meet the requirements necessary to qualify. Rates and terms are subject to change based on market conditions and borrower eligibility. This offer is subject to verification of borrower qualifications, property evaluations, income verification and credit approval. This is not a commitment to lend. The content provided is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply.4. By inputting your phone and clicking the "Check my rate" button, you authorize your wireless carrier to use or disclose information about your account and your wireless device, if available, to us or our service provider for the duration of your business relationship, solely to help them identify you or your wireless device and to prevent fraud. Additionally, you authorize Hitch and its service providers to obtain your name, address, email and Social Security Number from Equifax in order to validate your identity and/or populate this form. See our Privacy Policy for how we handle your data.
Hitch, Inc.2158 NW Toussaint DriveBend, Oregon 97703(833) 512-0284

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