A home equity line of credit is when the lender provides the borrower with a flexible line of credit into which the borrower can tap in as he pleases. The line of credit is guaranteed by the borrower’s house. The borrower may then make irregular withdrawals to pay-off various high interest debts.
The period is usually less than the30-year mortgages and involves two segments: the “draw” period and the “payback”
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period. The borrower may use the credit line at will during the “draw” period but is often required to make interest only payments. The accumulated debt must be repaid during the “payback” period which is typically longer.
Restrictions on how often you can use your credit line may apply, along with minimal withdrawal amounts. Some credit lines may require you to pay all the outstanding debt as soon as the “draw” period ends, so read your contract carefully.
Also, once you qualify for a home equity line of credit, the lender will review your credit history every year. If you run into financial trouble and your credit rating falls, the line of credit could be reduced or frozen.