Home Equity Line of Credit (HELOC)

Home equity line of credit (HELOC) summary:

• A home equity line of credit (HELOC) is a second mortgage, guaranteed by your home.

• When you get a HELOC, the first few years are the draw period. During that time, you can borrow, repay, and borrow more, as often as you like, up to your loan limit. 

•  Depending on how much home equity you have, you might be able to borrow more with a HELOC compared to other kinds of loans. And since it’s guaranteed by your home, a HELOC typically has lower interest rates compared to other kinds of loans.

Home equity line of credit (HELOC) definition and meaning

A home equity line of credit or HELOC is a flexible line of credit that's guaranteed by your home. 

During the first few years of your HELOC (the draw period), you can borrow, repay, and borrow more, up to your credit limit, much like a credit card. 

After the draw period, you’ll pay off what you owe for a predetermined number of years (the repayment period). If your loan has a fixed interest rate, your payments won’t change. In this sense, during repayment, the HELOC looks more like a traditional installment loan. 

A HELOC is typically a second mortgage. Your ability to borrow a HELOC hinges on your credit scores, income, and the amount of equity you have. 

More about home equity lines of credit (HELOC)

Home equity is the difference between your home’s value and the amount you still owe on your mortgage. A HELOC allows you to borrow against your home equity and withdraw cash to use to fund your financial goals. 

HELOCs are usually second mortgages. In other words, most HELOC borrowers are still paying off the mortgage on their home. In that case, the monthly payment on the HELOC is in addition to the monthly payment on the mortgage. 

If you have sufficient equity in your home, you might want to use a HELOC instead of a personal loan or credit card. A HELOC may offer lower interest rates, bigger loan amounts, and greater flexibility.

How does a HELOC work?

A HELOC works by allowing you to borrow against your home equity. You have to pay back what you borrow with interest, but you could use the money for just about anything. Some common HELOC uses include:

• Debt consolidation

• Home improvements or repairs

• Medical bills

• Wedding expenses

• College expenses

• Large purchases

• New appliances or electronics

The terms of your HELOC are set by the lender. A typical HELOC will have a draw period during which you can access your credit line. For example, you might have five years to borrow, repay, and borrow more as often as you like, up to your loan limit.

Once the draw period ends, the repayment period begins. Repayment on a HELOC typically lasts 10 to 30 years. You'll make payments monthly, with interest. 

Benefits of a HELOC

HELOCs offer flexible access to cash that you could use for different financial needs or goals. A fixed-rate HELOC allows for predictability, since your interest rate and monthly payments won't change. The better your credit score, the lower the rate might be. 

Who is a HELOC right for? You may consider a HELOC if you:

• Have a decent amount of equity in your home

• Can qualify for a low rate based on your credit scores

• Want to borrow a larger amount than is common with personal loans