So we are looking at getting a 50k Heloc to pay for home improvements. I just need a few answers. I am planning on using Third Federal. They have low rates and no prepayment penalties. The plan is to draw what we need and then pay back each month to have it paid before the ten year drawing period ends. Is that allowed? I used a calculator and if we drew the full 50k at 7% we could pay it all off in less than 10 years with a $600 a month payment. We would pay more, but using that as an example. Does that sound right? Am I missing something? I am choosing a heloc instead of a loan in case something comes up in year 7, 8, 9 etc then we could draw again. I think that's how it works.
I am a dummy and any help is appreciated. Thanks
Heloc questions from a newbie
byu/Zebilmnc inpersonalfinance
Posted by Zebilmnc
3 Comments
HELOCs have a Draw period where you can take and repay at your own choosing up to your credit limit. The APR is normally variable.
Following the Draw period, the remaining balance becomes a Home Equity Loan at a fixed term and fixed APR.
Edit: My CU also charges an annual fee of about $100 after the first year.
Most (but not all) HELOCs are variable rate, although when it starts to vary depends on the loan (it might start to vary after the draw period). If it varies before you pay it off, your monthly payment may become insufficient to have it paid off in the time you expect.
My HELOC will disappear if there’s no balance left at the end of the draw period (my draw period is 3 years, so if I have no balance then the loan just goes away since there’s nothing to pay). Your loan is probably the same way, but you’d have to check the terms to be sure of how it works and whether there are any fees or penalties.
Generally there’s a draw period followed by a repayment period of 10-20 years.
During the draw period you typically only have to make minimum payments (sometimes interest only, depends on the product), and you can continue to take money out up to the max of your credit line.
Whatever’s outstanding at the end of the draw period will produce a minimum payment amount calculated by amortizing the outstanding balance over the term of the repayment period. During the repayment period you can’t take any more money out.