HELOC (Home Equity Line of Credit)

A HELOC has two phases, and the transition is what catches borrowers out. During the draw period, often ten years, you can borrow and repay freely and many lenders require interest only — so the payment feels manageable and the balance need never fall. When the repayment period begins, interest-only ends and the full balance must amortise over the remaining term, which can raise the payment sharply on a debt that had felt costless. The rate is also usually variable, tracking prime, so it rises with Federal Reserve moves within a cycle or two. And it is secured by your home. That is why a HELOC is a poor substitute for an emergency fund: lenders have frozen or reduced lines precisely during downturns.

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