Loans Home Equity Loans 2

Question 1

What is the 'draw period' of a HELOC?

Accepted Answer

The period during which the borrower can withdraw funds from the line of credit

Answer

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?

Accepted Answer

No more draws are allowed and the borrower must repay the outstanding balance, typically over 10–20 years

Answer

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:

Accepted Answer

Buying, building, or substantially improving the home securing the loan

Answer

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?

Accepted Answer

Variable rate, typically tied to the prime rate

Answer

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?

Accepted Answer

Truth in Lending Act (TILA)

Answer

TILA requires HELOC lenders to disclose terms, APR, fees, and payment examples at various interest rate scenarios before the borrower is committed.

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Loans Practice Test

Loans Home Equity Loans 2