Loan Officer Practice Exam

What type of mortgage allows for multiple advances of funds up to an approved limit?

1. Bridge loan

2. Home equity line of credit

3. Home equity loan

4. Installment second mortgage

The correct answer is: Home equity line of credit

A home equity line of credit (HELOC) is a type of mortgage that enables a borrower to access multiple advances of funds up to an approved limit. This borrowing option functions similarly to a credit card, where the homeowner can draw on the line of credit as needed, up to the specified limit, and repay and borrow again as required. This flexibility makes HELOCs appealing for various financial needs, such as home renovations or other expenses, while the borrower pays interest only on the amount drawn. In contrast, a bridge loan is typically a short-term financing option meant to cover the gap between a buyer's purchase of a new property and the sale of their old property, and it does not offer multiple draws like a HELOC. A home equity loan provides a lump sum of money at a fixed interest rate and requires repayment over time, without the flexibility of drawing additional funds after the initial loan amount is disbursed. An installment second mortgage allows a borrower to receive a fixed amount of money and repay it in installments, which similarly lacks the revolving credit feature that characteristic of a HELOC.