How To Get a Home Equity Line of Credit

A Home Equity Line of Credit, also known as a HELOC, is slightly different than a Home Equity Loan.  Both are second mortgages based on the equity in your home and are secured by the home itself.  That means that if you default on the loan, the lender may foreclose on your home to pay off the debt. 

With a home equity loan, you get 100% of the loan proceeds right up front to use as you wish.  You will then begin making payments over the life of the loan for the principle and interest, similar to a first mortgage.  

With a HELOC, you get a checkbook.  You will only pay interest on what you actually borrowed.  The difference will still be available to use at a later date.  As soon as you borrow from the HELOC, you usually are required to start making monthly payments.  

Typically with a HELOC, you have a certain amount of time to draw - or write checks - on the account.  That time period can vary, but 10 years is common.  Then, when the draw period is over, you have the repayment period - usually another 5 years.  

There are various companies who will lend money under a HELOC.  Listed below are some of them.

• Your existing mortgage company.  They already have a relationship with you and would like to add to the relationship.
• Your bank.  Even banks that don't offer first mortgages often offer a HELOC.  Again, they would like to expand on your existing relationship.
• Other mortgage companies and banks.  Most of these are eager for new business and will sometimes offer deals to bring in new business.

Often you will need an appraisal.  However, it is usually better to wait until the lender requests one.  You don't want to pay for more than one appraisal.  

There are several key parts to your HELOC.

1. Interest rate.  This is the most important.  The lower the interest rate the better.  Interest rates on HELOCs are almost always fully adjustable.  This means they can adjust at any time and have no limits to how high they can go.  They are usually tied to the prime rate.
2. Closing costs.  Many lenders will offer a "no closing cost" option.  Many of those will also charge you a slightly higher interest rate to allow them to make some money.  So again, interest rates are key.
3. Term.  Think about how frequently you will be drawing from this account.  You may need only a 5-year draw period while others may need a 10-year draw period.  Some lenders also offer the option to convert a part of the used HELOC to a fixed term and rate during the draw period.  This helps keep your interest rate from fluctuating on the fixed part.  However, if you get part of that fixed portion paid off, it doesn't usually become available to borrow from again.   
4. Documentation needed.  HELOCs don't usually require the amount of documentation needed for a first mortgage.  But there will still be a fair amount.

Make sure you shop around to make sure you are getting the best deal.  There is plenty of variety so make sure you get what you really want!