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What is a Home Equity Line of Credit? And how do you use it?

A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses such as a kitchen remodel, a pool addition, or even a vacation.

 You can also use a home equity line of credit to consolidate higher interest rate debt on other loans such as credit cards. Often, a home equity line of credit has a lower interest rate than other common types of loans and interest may be tax deductible.1

 

How does it work?

With a home equity line of credit, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – similar to a credit card. With this type of credit, you can borrow as much or as little as you need throughout your draw period up to your credit limit.

What is the draw period? The time you have to ‘draw’ or utilize the funds on your line of credit. This is typically 10 years.

What is the repayment period? At the end of the draw period, the repayment period begins. This is typically 10 years.

 

Qualifying for a Home Equity Line of Credit

In order to qualify for a home equity line of credit, you need to have available equity in your home. This means that the amount you owe on your home (mortgage balance) must be less than the value of your home. Additionally, like other loans, the lender will assess your creditworthiness – the lender will look at your credit history, credit score, income, and debt similar to when you applied for your mortgage. (Read more about credit scores.)

 

Variable Interest Rates

When you have a variable interest rate on your home equity line of credit, this means that the rate can change. Variable rates are calculated using both an index and a margin.

An index is a financial indicator used by financial institutions to set rates. At Campus Federal, we use the Wall Street Journal Prime Rate as the index for our Home Equity Line of Credit, like many other financial institutions. (see our rates)

The margin, which is the percentage added to the index rate, is constant throughout the term of the home equity line of credit.

As you draw money from your home equity line of credit, you’ll receive monthly bills with minimum payments indicated that include interest and principal. The balance and the interest rate changes can cause your monthly payment to change. Making additional principal payments is a good way to reduce your overall debt, pay off debt quickly, and may save you on interest charged.

 

Closing costs

Similar to a mortgage, there are closing costs associated with a home equity line of credit. We offer up to $300 towards closing costs on lines of credit with an initial draw of $15,000 or more.2

 

Read more about our Home Equity Line of Credit.

Have more questions? Speak to one of our Member Service Representatives today.  

 

 

1 Individual tax situations may vary. Consult your tax advisor for further information.

2 On lines of credit in which the first draw is $15,000 or more. Some restrictions apply. Contact a Campus Federal representative for more details.