Understanding a California Home Equity Line of Credit

For many people living in California a home equity line of credit, or HELOC, can help them through financially trying times. These are open ended or revolving loans that allow you to advance yourself money up to a pre-approved credit limit. In this fashion they work much like a credit card.

The difference is the interest rate is normally set at a low rate and the payment options are flexible during the initial draw period. For instance if the draw period is ten years that's how long the line of credit is open for. As long as you are under the limit you can draw against it. In most instances at the end of the draw period the balance needs to be paid in full.

As you take out advances during the draw period you will start to make monthly payments, most of which will go towards paying back the interest. There are some lines of credit that will allow you to make interest only payments. You do have to be careful when paying only interest because many home equity lines of credit will have balloon payments as the draw period nears an end. The more you owe on that credit line the bigger these payments will be.

In a worst case the entire amount owed will need to be paid back in one lump sum. This is why it is important to understand all the terms before you sign the closing papers. In many cases there will be an option to pay back the loan over a fixed period of time after the draw period has ended, but you need to make sure this is the case before the bank is asking for payment in full.

In some cases the interest may be adjustable and is tied to the Prime Lending Rate, which is the rate the major banks charge their most credit worthy customers. There is usually a limit as to how high this interest rate can go. When the interest adjusts depends on the terms offered and is something you need to be aware of. Interest paid on a home equity line of credit is normally tax deductible.

If you are California resident you will have an option of deciding if you want outside or affiliate companies accessing your private financial records. Your lender can only disclose financial information because of the California Financial Information Privacy Act to companies who have a vested interest in securing the loan. If you are thinking about applying for a home equity line of credit it is important to keep all this in mind.

by Andrew Bicknell