What is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home's equity. Unlike a traditional home equity loan, a HELOC works like a credit card - you can borrow as needed up to your credit limit, pay it down, and borrow again during the draw period.
How HELOCs Work
HELOCs typically have two phases:
- Draw Period (5-10 years): You can borrow money as needed and usually only pay interest on what you've borrowed.
- Repayment Period (10-20 years): You can no longer borrow and must repay the balance with principal and interest payments.
Calculating Available Equity
Lenders typically allow you to borrow up to 80-85% of your home's value, minus your existing mortgage balance:
HELOC vs. Home Equity Loan
- HELOC: Variable rate, flexible borrowing, interest-only payments during draw period
- Home Equity Loan: Fixed rate, lump sum, fixed monthly payments from the start
Common Uses for HELOCs
- Home improvements and renovations
- Debt consolidation
- Education expenses
- Emergency fund backup
- Investment opportunities
Important Considerations
- Variable Rates: HELOC rates typically fluctuate with prime rate
- Your Home as Collateral: Failure to repay could result in foreclosure
- Payment Shock: Payments increase significantly when repayment period begins
- Closing Costs: Some HELOCs have fees similar to a mortgage
