What Are Home Equity Line of Credit Payment Terms?

HELOC agreements allow homeowners to set up a line of credit to cover the cost of both everyday and major expenses. These plans are offered by banks and financial institutions, and may involve upfront fees to establish the credit line, a fee for the property appraisal, charges based on the lender's point system, and closing costs such as a title search, title insurance and taxes. Credit payment terms vary significantly by lender; since the home is used as collateral for the credit line, homeowners must meet the monthly minimum payment requirement to avoid losing their home.

Home equity lines of credit are a type of revolving credit agreement that will show up on the borrower's credit report. The payment terms are determined using either variable rates or fixed interest rates. Variable rates are based on the prime rate plus another publicly available index, and may fluctuate considerably during a volatile economy. Fixed rates do not change, and may be a more stable and attractive option during a fluctuating economic climate. The credit payment terms for the home equity line of credit typically require making a minimum monthly payment that includes the principal plus the accrued interest. Borrowers may choose to pay more than the minimum payment amount, especially if they want to pay down their principal quickly.

Home equity lines of credit are different from cash advances, personal loans and credit card agreements because they allow homeowners to "draw" money from their credit line over a specific number of years. This gives them the flexibility to obtain both small and large sums of credit only when they need it. They can use the credit and then repay it on their own schedule to avoid accumulating a lot of debt, and can continue to draw money within the agreement's draw period. A borrower will usually use a special check to draw from his line of credit, but in some cases will be allowed to use a credit card or special bank card to access his funds.

In order to apply for a home equity line of credit, the lender will need the current appraised value of the home minus the balance owed on the mortgage. Every lender uses a different percentage of the appraised value to calculate the equity line, so it may be beneficial to shop around for the best rates. In many cases, the best offer will come through the bank or lending institution that provided the mortgage of the loan (see Resources below).

Both first-time homeowners and individuals who already own their homes can obtain a home equity line of credit to pay for major expenses. Many homeowner use their home equity line of credit to pay for a college education, medical bills, home renovations or home improvement projects, or even to take a vacation. Borrowers can borrow up to the full amount of credit at any time, as long as they continue to make at least the monthly minimum payments.