Loans Home Equity Loans 2 — Questions and Answers
Question 1: What is the 'draw period' of a HELOC?
- The time to close the HELOC after application
- The period during which the borrower can withdraw funds from the line of credit (Correct answer)
- The waiting period before any withdrawals are allowed
- The final repayment period of the HELOC
Correct answer: The period during which the borrower can withdraw funds from the line of credit
The draw period is the time (typically 5–10 years) during which the HELOC borrower can draw funds up to the credit limit, often paying interest only.
Question 2: After the draw period ends, what happens during the HELOC repayment period?
- The HELOC converts to a revolving credit card
- No more draws are allowed and the borrower must repay the outstanding balance, typically over 10–20 years (Correct answer)
- The interest rate drops to 0%
- The lender refinances the balance into a new HELOC automatically
Correct answer: No more draws are allowed and the borrower must repay the outstanding balance, typically over 10–20 years
Once the draw period ends, the repayment period begins, during which the borrower repays principal and interest on any outstanding balance over a set term.
Question 3: The interest on a home equity loan is potentially tax-deductible when the proceeds are used for:
- Paying off credit card debt
- Buying a car
- Buying, building, or substantially improving the home securing the loan (Correct answer)
- Funding a vacation
Correct answer: Buying, building, or substantially improving the home securing the loan
Under current IRS rules, home equity loan interest may be deductible only if the proceeds are used to buy, build, or substantially improve the qualifying residence securing the loan.
Question 4: What type of interest rate do most HELOCs carry?
- Fixed rate throughout the entire term
- Variable rate, typically tied to the prime rate (Correct answer)
- Zero interest rate during the draw period
- Rates set by the Federal Housing Administration
Correct answer: Variable rate, typically tied to the prime rate
Most HELOCs carry variable interest rates indexed to the prime rate, meaning payments can increase if the Federal Reserve raises rates.
Question 5: Which federal law requires lenders to provide borrowers with a disclosure of HELOC terms, including payment estimates at different interest rate levels?
- Fair Housing Act
- Truth in Lending Act (TILA) (Correct answer)
- Real Estate Settlement Procedures Act (RESPA)
- Gramm-Leach-Bliley Act
Correct answer: Truth in Lending Act (TILA)
TILA requires HELOC lenders to disclose terms, APR, fees, and payment examples at various interest rate scenarios before the borrower is committed.
Question 6: A homeowner has a home worth $400,000 and a mortgage balance of $250,000. If the lender allows 80% CLTV, what is the maximum HELOC or home equity loan amount available?
- $70,000 (Correct answer)
- $80,000
- $120,000
- $150,000
Correct answer: $70,000
80% of $400,000 = $320,000 maximum total debt; minus the $250,000 first mortgage = $70,000 available for a HELOC or home equity loan.
Loans Home Equity Loans 2
What is the 'draw period' of a HELOC?