Home equity line of credit

Before you rely on it

What to check

Find the date the draw period ends and model the payment after it, at a rate above today's.

The common error

Where people go wrong with home equity line of credit

Treating the draw-period payment as the cost of the loan. It is the cost of the first phase, and the second phase is where the money is.

Worked through

Home equity line of credit in plain numbers

A homeowner opens a $50,000 line and draws $30,000. In the draw period, often ten years, payments may be interest only. At a variable 8.5%, that is $30,000 × 0.085 ÷ 12, about $212.50 a month. Then the repayment period begins, say twenty years, and the balance must be paid off with principal and interest. On $30,000 at the same rate the payment rises to roughly $260. If the rate climbs to 10.5%, the interest-only payment jumps to $262.50 while the draw period is still running. Because the rate floats, the payment can change without any action on your part.

Easily confused

Home equity line of credit and its neighbours

A HELOC is not a home equity loan and not a cash-out refinance; a home equity loan pays a lump sum at a fixed rate with fixed payments. A HELOC is a revolving line you draw on as needed, usually at a variable rate, and you can borrow, repay and borrow again during the draw period; a cash-out refinance replaces the first mortgage with a bigger one and gives you the difference. Each has different costs, rates and risks. A HELOC is closer to a credit card secured by your house.

In real decisions

Where home equity line of credit turns up

Homeowners use HELOCs for renovations, education costs, emergency reserves or bridging cash needs; the flexibility suits expenses that arrive in stages; some keep a line open unused as a backstop. Borrowers compare the rate index and margin, fees, draw and repayment periods and any minimum draw or early closure fee. Lenders set limits from the home's value and the owner's credit and income.

Know the edges

Where home equity line of credit stops being reliable

The home secures the debt, so missed payments can lead to foreclosure. Variable rates make future payments uncertain. Lenders can freeze or reduce a line if home values fall or your finances change, and the jump from interest-only payments to full repayment surprises many borrowers; use the line for purposes you can justify, keep the balance within your means and read the terms carefully. This is general education, not advice.

Quick answers

What people ask about home equity line of credit

What is the difference between draw and repayment periods? During the draw period you can borrow, and payments may be interest only. In the repayment period, you can no longer draw and must repay principal and interest.

Are HELOC rates fixed? Usually variable, tied to a benchmark plus a margin. Some lenders let you fix a portion of the balance.

What are the risks? Payments can rise, the lender can freeze or lower the line, and the home secures the debt. Borrow only what you can repay comfortably.