HELOC stands for home equity line of credit, or "home equity line" in simpler terms. It is a loan in which the lender agrees to lend a maximum amount of money within an agreed period. HELOCs have a draw period when a borrower can use the money and repayment period during which it must be repaid. Most HELOCs are second mortgages, however, many are also first mortgages. Find the advantages and risks of a Pennsylvania HELOC below.
Advantages of HELOCs
- HELOCs are convenient for paying off credit cards, making home improvements, or paying college tuition.
- You draw and pay interest on only what you need.
- Upfront costs are also relatively low.
- Can be converted into fixed-rate loans at the time of a drawing. This is a useful option for borrowers who draw a large amount at one time.
The Risks of a HELOC
- Interest rate risk. Changes in the market impact a HELOC very quickly. If the prime rate changes one day, the HELOC rate will change effective the very next day.
- HELOC rates are tied to the prime rate, which in the past few years have had the tendency to change more frequently than would be favorable.
- HELOCs have no adjustment caps, and the maximum rate is 18%.
Interest on a HELOC
Because the balance of a HELOC may change from day to day, depending on draws and repayments, interest on a HELOC is calculated daily rather than monthly. On a 6% HELOC, interest for a day is .06 divided by 365 or .000164, which is multiplied by the average daily balance during the month. If this is $100,000, the daily interest is $16.44, and over a 30-day month interest amounts to $493.15; over a 31 day month, it is $509.59.
In contrast, on a standard 6% mortgage, interest for the month is .06 divided by 12 or .005, multiplied by the loan balance at the end of the preceding month. If the balance is $100,000, the interest payment is $500, regardless of whether there are 30 or 31 days in the month -- or 28.
APR on a HELOC
Don’t compare the APR on a HELOC with the APR on a standard loan because they mean different things. The APR on a HELOC is the interest rate, period. Among other things, it does not reflect points or other upfront costs, as the APR on standard loans does. Requiring lenders to show the interest rate on a HELOC twice is a strange way to protect borrowers, but there it is.
Lion Mortgage offers HELOCs in Pennsylvania and can help you decide if a HELOC is the right option for you, or a more traditional refinance. Contact us today or apply online and one of our knowledgeable and experienced mortgage professionals will contact you as soon as possible.
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