What is a HELOC? - Stark Federal Credit Union

What is a HELOC?

A HELOC is an open credit line that is secured by your home’s value. A Home Equity Line of Credit. HELOCs have adjustable interest rates and have a “draw” period in which you can access the funds, ranging from 5-10 years. When the draw period ends, the loan will have to be repaid, either immediately or within the next 15-20 years.

If you’re approved for a HELOC, you can spend the funds however you choose. Some plans may require that you borrow a minimum amount at each draw, keep a predetermined amount outstanding (balance), or withdraw an initial advance when the line of credit is first established (initial draw/advance).

When looking for a way to pay for home improvement projects, we recommend a HELOC. And for good reason.

Here are just a few benefits of choosing a HELOC over another loan type:

  • You’ll save money
  • HELOCs help you stick to your budget. Instead of walking out with a huge amount of cash when you open the loan, you’ll have access to a line to use as needed. This credit will only be available to you for a specified amount of time and it will have a fixed amount as your maximum draw. You’ll withdraw money in the amount and at the time you need. Plus, you’ll only pay interest on this amount (not the whole line). This aspect of HELOCs makes them especially convenient if you don’t know exactly how much your project will cost.
  • Upfront costs for HELOCs also tend to be lower than those of other loans.
  • Flexible terms. Most HELOCs have fluctuating interest rates, but some lenders allow for the possibility of converting large withdrawals into fixed-rate loans. Repayment of HELOCs is also flexible. When the draw period ends, you may be allowed to renew your credit line and continue withdrawing funds as needed.
  • Monthly payments also vary. However, many lenders only require borrowers to make payments toward the interest of their loan during the draw period. Once that time is over, the borrower will need to pay back the entire principle of the loan immediately, or over the course of 10-15 years. This is especially beneficial if you don’t have the funds to pay back the loan now, but you anticipate an improvement in your financial situation over the next few years.

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