A home loan can be extra convenient when you can use the money as you need it. Some home loans, notably home equity lines of credit, carry a draw period. This is a time when you have a credit line available to you that you can access as needed, only paying on what you use. Once the draw period expires, you will flip into a repayment period, during which the loan amortizes down to a zero balance.
The draw period is the time during which you can access your credit line. The credit line is the maximum amount you qualify for based on your income and your loan-to-value. The lender qualifies you as if the line was fully drawn, but you don't start paying until you actually access it. Depending on your lender, you may have a minimum or maximum amount for any one draw. For example, you may have to advance at least $500 if you want to access the line.
Using the Money
In most cases, you get a set of checks to use once you close on the loan. When you want to access the money, you write out a check. You make the check payable to either the recipient or to cash, in which case you can deposit it into your personal checking account. Other options besides a check include a credit card or online transfer capability. Depending on the bank, you will have between five and 10 years to access the money. If you pay back the principal balance at any time, that money will become available to you again.
Once you access the line, you begin to pay interest on the amount you've used. The interest rate is floating, meaning it can change daily. It is tied to an index, usually the prime rate as published in the Wall Street Journal, plus a margin. If your rate is prime plus a margin of 1 percent, with Prime being 3.25, your net rate is 4.25 percent. You pay just the interest monthly on the amount you've used. If your rate is prime plus 1 percent and you've used $25,000 of a $100,000 credit line, you will pay 4.25 percent on $25,000 until the rate or your credit line changes.
After the draw period expires, the loan will flip into a repayment period. This is typically a fixed-rate term of 10 to 20 years. The loan will convert at whatever balance is outstanding at the end of the draw period. So if you have a $100,000 line with $80,000 drawn, you will repay the $80,000. The remaining $20,000 goes away. You begin to make a fixed monthly payment of principal and interest and continue to do so until the loan is repaid in full. You can make extra payments to principal at any time without a penalty.
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