Home Equity Line of Credit - Variable Rate (May come with option to fix rate)

A HELOC (Home Equity Line of Credit) is a type of home mortgage, usually a second mortgage, that will be secured by the value of your home. These home loan programs are a far more flexible form of financing than their fixed rate mortgage counterparts, imagine it as a credit card against the equity of your home. With a line of credit the homeowner can borrow any amount of money up to the high credit limit, pay the balance down and borrow the money again and again over the term of the loan agreement. This will allow them to borrow only what they need and therefore pay interest on the revolving balance and not the full limit of the line amount.

In determining your credit limit, your income, debts, credit history and other financial obligations will be reviewed. An appraisal may be required on your home to determine the home's market value. Your credit limit will be based on a percentage of your home's appraised value, which is then subtracted from the balance owed on any existing mortgage.

Most HELOCs have a fixed period (5, 10, even 20 years) during which you can borrow money. Typically, you will use special checks or a credit card to draw on your line. You will be required to make a minimum payment each month – usually the interest that accrued during the draw period. However, the interest you pay is usually tax deductible. At the end of your "draw period," you will be required to pay off the loan, making monthly payments on the principal and interest.

HELOC’s are convenient for funding intermittent needs, such as paying off credit cards, making home improvements, or paying for college tuition. You can draw on the credit line as needed at your convenience and pay only the monthly interest that has accrued on the balance. The upfront costs are relatively low and you may draw on your HELOC by writing a check, wire transfer, or even a by use of a credit card.

One important consideration is that HELOC’s are variable interest rate indexed loans. The interest rate of a HELOC is calculated by adding the loan’s index, the variable portion of the interest rate, to the margin, or fixed portion of the interest rate. So the interest you pay on this loan can fluctuate with changes in the index. For example, the index value on many HELOC’s is based on the Prime Interest Rate. Changes in the prime rate will trigger changes in the HELOC's interest rate.

The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers. In general, the prime rate runs approximately 300 basis points (or 3 percent) above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements. Unlike other indexed rates, the prime rate does not change on a regular basis; rather, it changes whenever banks need to alter the rates at which borrowers obtain funds.