- A HELOC usually has a variable rate of interest which means it is tied to some type of index such as the prime, or the LIBOR plus a margin. If the index increases the interest rate on the HELOC can increase which ultimately raises the monthly payments. A larger payment can affect a borrower's ability to make the monthly payments. It is difficult to budget when your monthly payment can change periodically.
- You can access the funds from a HELOC by going to your bank and requesting a cash advance. The account can also be accessed by using convenience checks which are similar to your personal checks. Checks can be written against your credit limit to make purchases. The HELOC account can also be linked to your check card which allows you to make transfers between accounts including checking and savings. If you link your HELOC to your checking account it can serve as overdraft protection which prevents you from bouncing a check and incurring overdraft fees. Your HELOC account can also be viewed online.
- A home equity is also considered a second mortgage. If the borrow decides not to pay or is unable to pay the lender can start foreclosure activities and repossess the home. After the home has been sold at a sheriff's auction the borrower will still be responsible for any remaining balance. This can impact the borrower's credit report in a negative manner. The credit score will be lowered significantly.
- When you have a HELOC your payments are interest-only for a certain period of time, usually five to 10 years, then you must make payments that go toward the principal balance. Your repayment period is a maximum of 15 years. The interest on a HELOC is calculated on a daily basis.
- If market conditions change in a negative way, the value of your home could decrease which would reduce the amount of equity in your home. This will limit the amount of funds you have access to. Some lenders will lower your credit limit and even close your account in response to economic conditions.
