Mandatory draws can result in significant unplanned interest costs.

Traditionally, a home equity line of credit, known as a HELOC, offers homeowners a flexible way to tap into their home equity at a lower interest than other types of loans. Traditionally, this type of loan lets borrowers decide when to draw on their line of credit and how much. At Consumers, HELOCs still give homeowners complete control over their draws. However, HELOCs issued by nonbank lenders play by different rules, and many nonbank lenders require borrowers to make initial draws ranging from 50% to 100% of the credit line. Mandatory draws end up costing homeowners hundreds or thousands of dollars they didn’t expect to pay.

What’s a nonbank lender?

Nonbank lenders are financial institutions that do not hold a full banking license and therefore are less regulated. Unlike traditional banks and credit unions, these “nonbank banks” don’t offer savings and checking accounts.

How a nonbank HELOC disadvantages homeowners

Nonbank lenders structure HELOCs with mandatory draws when the loan is issued to ensure they start making a profit right away, but this can put homeowners at a disadvantage. Here’s an example. Meg and Sam get a $100,000 HELOC from a nonbank lender that requires an 80% initial draw. Even if the couple pays the loan back in 30 days, one month of borrowing at 7% interest will cost them $466.67. If Meg and Sam didn’t need to access cash from their HELOC right away, they end up with unnecessary interest costs.

High minimum draws have another downside. “Studies show that higher minimum draws can increase the likelihood of delinquent payments,” reports Yahoo Finance. “If a borrower is mandated to draw more than they really need—or have budgeted for—they might not be able to pay the bill.”

A Consumers HELOC remains as flexible as ever

“Bank how you want, when you want” isn’t just a slogan for us. A HELOC from Consumers puts you in control of how much you draw and when. Get current rates or apply now.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications and collateral conditions.