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Two Things You Must Know About Home Equity Lines Of Credit

A home equity line of credit (HELOC) can provide you with access to cash when you need it the most, such as paying for your child's education or eliminating medical debt. However, here are two important aspects to HELOCs you must take into account to ensure you're fully prepared to take on this financial responsibility.

A Balloon Payment May Be Required

To a lot of people, a line of credit is essentially the same thing as a credit card. They think they can take out money whenever they want and make a monthly payment to free up credit and keep their accounts current. However, this isn't necessarily true when it comes to HELOCs.

While you can take out money whenever you want up to your approved credit limit (which is equal to your home's equity), you're only allowed to do this for a certain amount of time called the draw period, which can be anywhere from 5 to 25 years. At the end of that time, the balance must be paid in full.

Some banks set it up so the minimum monthly payments you make during the draw period ensure your balance is paid off by the requisite time period. With other banks, however, the minimum monthly payment only covers the interest rate and you must make a balloon payment at the loan's end. It's important you ask the bank which option it uses and plan accordingly so you're not taken by surprise when you receive that big bill in the mail.

You Must Maintain the Equity in Your Home

The other thing you must remember about HELOCs is the credit limit is based on your home's equity, and one of the requirements of this loan is you have to maintain that equity during the time period your loan is active. For instance, if you're approved for a $100,000 HELOC, you must ensure you always have $100,000 in equity in your house.

This may not be a problem if you live in an area where home market values remain fairly consistent. If you live in a place where home values are on the decline or something happens that suddenly causes your home to be worth less, you may find yourself in a situation where you have to make up the difference between what you owe on your mortgage loan and your home's lower value to avoid having the limit on your HELOC lowered or having the loan come due immediately.

For more information about HELOCs or to take out a loan based on your home's equity, contact a local lender.