Home Equity Lending
AKA 2nd Mortgage Options
Home equity lines of credit (HELOCs) and home equity loans (HELOANs) are similar methods of borrowing money against the equity you have in your home. A HELOC is a line of credit with a variable interest rate, while a home equity loan is a lump-sum paid back in fixed installments for up to 30 years – just like a regular mortgage.
A lump-sum loan for a defined term with fully amortized repayments that include both principal and interest. Interest rates are fixed.
Two Phases of Home Equity Products
The withdrawal period, also known as the draw period, is the phase during which you can access funds from your home equity loan. This period typically lasts 5 to 10 years. During this time, you can borrow up to your limit, often via a line of credit. It’s flexible, allowing you to withdraw funds as needed, similar to using a credit card. Interest is usually charged only on the amount you draw, not on the entire credit line. Payments during this period are often interest-only, which keeps them lower but doesn’t reduce the principal amount.
Following the withdrawal phase is the repayment period. This phase can last 10 to 20 years, depending on your loan terms. During the repayment period, you can no longer draw on the equity. You must start paying back both the principal and the interest on the amount you borrowed. This means your monthly payments will be higher than during the withdrawal period. It’s crucial to plan for this increase in payments to avoid financial strain. The repayment period is all about steadily reducing the loan balance until it’s fully paid off.