What type of loan allows borrowers to draw on a credit line until a maximum amount is reached?

What type of loan allows borrowers to draw on a credit line until a maximum amount is reached?

• A. Home Equity Line of Credit (HELOC)
• B. Fixed Rate Mortgage
• C. Adjustable Rate Mortgage
• D. Second Mortgage

Answer: (A)

A Home Equity Line of Credit (HELOC) is specifically designed to allow borrowers to draw on a credit line up to a predetermined maximum amount. This type of loan is secured by the equity in the borrower's home, meaning that the homeowner can borrow against the value that exceeds their mortgage balance. The flexibility of a HELOC allows borrowers to access funds as needed, rather than receiving a lump sum like in a standard home equity loan. The available credit can be drawn upon for various uses, such as home improvements, debt consolidation, or other expenses, and borrowers typically pay interest only on the amount they draw, making it a versatile financial tool. The borrowing period usually lasts several years, followed by a repayment period where the borrower starts paying back the principal along with interest. In contrast, other loan types listed, such as fixed-rate and adjustable-rate mortgages, do not function as lines of credit; they are structured repayment loans where the entire loan amount is disbursed upfront. A second mortgage is another form of secured loan that can be taken out against the home's equity but is typically disbursed as a lump sum and does not provide a revolving line of credit like a HELOC does.

A Home Equity Line of Credit (HELOC) is specifically designed to allow borrowers to draw on a credit line up to a predetermined maximum amount. This type of loan is secured by the equity in the borrower's home, meaning that the homeowner can borrow against the value that exceeds their mortgage balance. The flexibility of a HELOC allows borrowers to access funds as needed, rather than receiving a lump sum like in a standard home equity loan.

The available credit can be drawn upon for various uses, such as home improvements, debt consolidation, or other expenses, and borrowers typically pay interest only on the amount they draw, making it a versatile financial tool. The borrowing period usually lasts several years, followed by a repayment period where the borrower starts paying back the principal along with interest.

In contrast, other loan types listed, such as fixed-rate and adjustable-rate mortgages, do not function as lines of credit; they are structured repayment loans where the entire loan amount is disbursed upfront. A second mortgage is another form of secured loan that can be taken out against the home's equity but is typically disbursed as a lump sum and does not provide a revolving line of credit like a HELOC does.