A HELOC is a credit line, much like the credit line of a credit card, that the homeowner can draw upon as needed, up to the limit of the credit, and repay as often as he wishes. The major difference between a credit card and a HELOC is that HELOC is secured by a home. Interest is charged on the balance owed. Mandatory monthly payment is for the amount of interest owed to the bank. HELOC's have terms of 15, 20, or 30 years. Most HELOC's have a 10-year "draw period" and a 20-year "repayment period". During the draw period, the homeowner can borrow, or draw, from the line of credit, up to the credit limit, as often as he wishes. During the repayment period, the homeowner cannot draw on the line. The balance owed is amortized to be paid back over the rest of the term. In reality though, a new HELOC is obtained to pay off the current HELOC when the draw period is up, so that the homeowner can have same borrowing power.
Because it is secured by a home, Home Equity Line of Credit is a mortgage. Because it is almost always subordinate to a first mortgage, HELOC is also referred to as "second mortgage". HELOC can also be in the first position if the first mortgage is paid off or if there is no mortgage to begin with when the HELOC is obtained.
Because HELOC's are subordinate to first mortgages in the order of satisfaction in case of foreclosure, not only do HELOC's carry higher interest rates, banks also require borrowers to have good credit profiles.
HELOC is available in different types of income documentation programs. Besides the usual Full Doc where the applicants' incomes and assets are disclosed by the applicants and verified by the banks, HELOC's are available in Stated Income Stated Assets, in which the borrower discloses his income and assets situation but does not offer documents to support the disclosed information.(As of Dec 2007, Stated-Income option no longer available).
The interest rates of most HELOC's are Prime based. Prime is an index of the average interest rates that major banks offer to their most valued customers. Depending on the income documentation, the current HELOC interest rates are between Prime + 0% to Prime + 0.75%.
For your mortgage needs, call today Lawrence Yip - Senior Loan Officer (718) 886-4438 Or email me at LYip@NYMort.com
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