What is a HELOC?
5 min read
•HELOC BasicsA HELOC, or Home Equity Line of Credit, is a revolving loan—like a credit card—secured by your home. You borrow against your equity, which is the portion of your home's value that you've already paid off.
Think of a HELOC as a financial bridge between your home's value and your goals.
How a HELOC Works
Equity and Credit Limit
- Your home's current market value minus what you owe = your equity.
- Most lenders allow you to borrow up to 80–85% of your home's value, minus your existing mortgage.
- For example: $400k home value - $200k mortgage = $200k equity. At 80%, you could access up to $120k ($400k × 80% - $200k).
Draw Period
- This is usually 5–10 years.
- You can tap funds using checks, an app, or a card—anytime—up to your limit.
- Often, you're only required to pay interest on what you borrow during this period.
Repayment Period
- After the draw period, the loan switches to a repayment phase.
- Now you must pay both principal and interest—like a typical loan—over a fixed term, often 10–20 years.
Variable Interest
- Most HELOCs have variable interest rates tied to an index plus a margin (e.g., prime rate + 1–2%).
- Some lenders offer the option to lock in a part or all as a fixed rate during the draw period.
Benefits of Using a HELOC
- Flexibility: Borrow only what you need—keeping unused funds available for later.
- Lower Interest: Secured by your home, rates are often lower than credit cards or personal loans.
- Potential Tax Benefits: Interest may be tax-deductible when used for major home improvements—always check IRS rules.
- Smart Access to Wealth: With U.S. homeowners holding trillions in equity, a HELOC can serve as an emergency or opportunity fund.
When a HELOC Is a Good Idea
Home Improvements
Funding improvements that raise your property value
Major Expenses
Education costs, medical bills, or other significant expenses
Debt Consolidation
Paying off higher-interest credit cards or loans
Risks and Considerations
- Your Home is Collateral: If you can't repay, you risk foreclosure.
- Variable Rates: Your payments can increase if interest rates rise.
- Payment Shock: When the draw period ends, your payments may jump significantly.
- Fees and Costs: Application fees, annual fees, and closing costs can add up.
HELOC at a Glance
| Feature | Details |
|---|---|
| Type | Revolving line of credit |
| Loan Term | Draw period (5-10 years) + Repayment period (10-20 years) |
| Interest Rate | Variable (typically prime + margin) |
| Borrowing Amount | Up to 80-85% of home value minus existing mortgage |
| Repayment | Interest-only during draw, principal + interest during repayment |
| Best For | Home improvements, debt consolidation, ongoing expenses |
Final Thoughts
A HELOC is a **powerful financial tool** when used wisely. It offers:
- Smart access to your home's equity
- Flexibility to borrow as needed
- Potential tax and interest advantages
However, remember that your home secures this debt. Only borrow what you can comfortably repay, and have a clear plan for how you'll use the funds.
- Shop around: Compare rates, fees, and terms from multiple lenders.
- Budget for rate increases: Plan for potential payment increases due to variable rates.
- Use responsibly: Avoid using a HELOC for everyday expenses or luxury purchases.