A HELOC or Home Equity Lines of Credit is a second mortgage that allows the borrower to pull equity out of their home, without refinancing their first mortgage. If a borrower has a low-interest rate on their mortgage but is looking to pull out some equity to, say, remodel a bathroom or upgrade their kitchen, a HELOC can be a cost-effective way to get them that cash, without sacrificing the low rate they may have on their first mortgage.
Now, let’s dive deeper into the specifics. A HELOC is typically what is referred to as a portfolio product. They are offered by most banks and credit unions and fall under a different category than traditional fixed mortgage products. In fact, most HELOCs do not have a fixed rate, but instead are tied to Prime, and therefore fluctuate as that rate goes up or down. HELOCs usually have a period of time (often 10yrs) where the borrower can “draw” on the loan. During this draw period, borrowers can withdraw funds and pay back the loan as many times as they want. Another common feature of this product is the interest-only payments that are due during the draw period. Both of these features make it great for those home-improvement costs that add up as the project progresses, instead of a lump-sum loan with payments due whether you have used all of the money or not.
It is important for borrowers to be aware that, after that draw period ends, they can no longer withdraw funds from the loan and full principal and interest payments are due for the remainder of the loan term. With home prices rising, many borrowers now have quite a bit more equity than they had even a couple of years ago, so this is a product that might be worth taking a second look at.
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Resources:
https://www.dallasfed.org/research/economics/2022/0329
https://www.housingwire.com/articles/is-the-dallas-fed-right-to-label-this-a-housing-bubble/