A home equity line of credit, or HELOC, is a revolving credit line secured by your home and uses the equity that is available. Unlike traditional installment loans that provide a fixed dollar amount at the start of the loan’s term, a HELOC establishes a line of credit. You control how much and how often you borrow, up to the maximum amount of your line. A HELOC can be used to pay for almost anything, from paying for major expenses such as home improvements or college tuition to consolidating higher-rate debt from other loans or credit cards.
During the first 10 years, also known as the draw period, the minimum monthly payment is your choice of either 1% or 2% of the outstanding balance, or interest only for those who qualify. At the end of the draw period, your entire outstanding line balance will transition into the repayment period. Principal plus interest payments are required during the 20-year repayment period.
Because your home is used as collateral for a HELOC, there is less risk involved for banks, which typically offer lower interest rates on HELOCs than they do for unsecured loans.
Additional advantages of a HELOC include:
You have lots of options to access available funds. Use your HELOC convenience checks or transfer money to your U.S. Bank checking account and make purchases or pay bills – including higher interest rate credit card bills. You can also use your Visa® Access card anywhere Visa® is accepted.
A home equity line is a ready source of money for unexpected expenses, such as a damaged roof or a flooded basement.
In addition to often having lower rates, there are no closing costs associated with a home equity line, so HELOCs often are a less expensive credit option than personal loans or credit cards.
A Fixed Rate Option allows you to lock in a fixed rate on any portion of your outstanding variable balance during the draw period. You can have up to three fixed rate options in place at any time.
HELOCs have a variable interest rate, which is tied to an index, such as the Wall Street Journal Prime rate. As a result, your monthly payments would change as the Prime rate rises or falls. For example, on a $50,000 HELOC balance, at an APR of 4.65%, the estimated interest-only payment would be $193.75. If Prime increased 0.25% to an APR of 4.90%, the estimated interest-only payment would be $204.17 – a difference of $10.42.