A home equity line of credit (HELOC) is a revolving, secured loan that allows homeowners to borrow money using the equity in their home as collateral. Equity is the difference between the current market value of the home and the outstanding mortgage balance. Essentially, a HELOC lets you borrow repeatedly up to a set credit limit during a defined draw period, typically around 10 years, and you can repay and borrow again within that limit
. Key features of a HELOC include:
- Revolving credit: You can borrow, repay, and borrow again up to your credit limit during the draw period, similar to a credit card
- Collateral: Your home secures the loan, so failure to repay may lead to foreclosure
- Variable interest rates: Most HELOCs have variable rates based on an index (often the U.S. Prime Rate) plus a fixed margin, causing monthly payments to fluctuate
- Draw and repayment periods: During the draw period, you often pay interest only and can borrow as needed. Afterward, in the repayment period, you must pay both principal and interest, which can increase monthly payments significantly
- Credit limit: Typically up to 65% of your home's value minus any outstanding mortgage balance, though this can vary by lender and region
- Flexibility: Funds can be used for major expenses like home improvements, education, or debt consolidation, but are generally not intended for everyday expenses
Costs and risks include potential fees (application, annual, closing, or early closure fees), fluctuating interest rates, and the risk of losing your home if you default
. HELOCs usually offer lower interest rates compared to unsecured loans or credit cards because they are secured by your home
. In summary, a HELOC is a flexible borrowing tool that taps into your home equity, providing access to funds as needed with the home as collateral, but it requires careful management due to the risks involved
