What is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit, or HELOC, is a type of loan that allows homeowners to borrow against the equity they’ve built up in their home. Unlike a traditional loan that provides a lump sum, a HELOC works like a credit card, giving you access to a revolving line of credit that you can draw from as needed, up to a set limit.

Key features of a HELOC include:

  1. Flexible Borrowing: A HELOC gives you a line of credit you can borrow from over a specified period, called the "draw period," which typically lasts 5 to 10 years. During this time, you can borrow as much or as little as you need, up to your approved limit, and only pay interest on the amount you borrow.

  2. Repayment Terms: After the draw period, the repayment period begins, which usually lasts 10 to 20 years. During this phase, you can no longer draw funds, and you’ll be required to pay back both principal and interest.

  3. Variable Interest Rates: HELOCs often have variable interest rates, meaning your interest rate may change over time based on market conditions. This can make monthly payments fluctuate. Some HELOCs offer an option to convert part or all of the balance to a fixed rate during the repayment phase.

  4. Use of Funds: You can use funds from a HELOC for various purposes, such as home improvements, paying off high-interest debt, medical expenses, or education costs. Since a HELOC is secured by your home, interest rates are typically lower than on personal loans or credit cards.

  5. Costs and Fees: Common fees associated with a HELOC include application fees, appraisal fees, and annual maintenance fees. Some HELOCs also have closing costs, though many lenders offer no-closing-cost HELOCs.

  6. Risk to Your Home: Since a HELOC is secured by your home, failure to repay the loan could result in foreclosure. It’s essential to borrow responsibly and ensure you can make payments, even if interest rates rise.

  7. Credit and Equity Requirements: Lenders generally require you to have at least 15% to 20% equity in your home to qualify for a HELOC. Your credit score and financial situation will also impact your eligibility and the terms of the HELOC.

  8. Tax Benefits: Interest paid on a HELOC may be tax-deductible if the funds are used for home improvements, though tax laws can vary, so it’s important to consult a tax professional for details.

A HELOC is a flexible and convenient option for accessing your home's equity without committing to a large, lump-sum loan. However, because of the variable interest rates and the risk to your home, it’s important to weigh the pros and cons carefully before choosing this option.

A Home Equity Line of Credit (HELOC) and a Home Equity Loan (HELoan) both allow homeowners to borrow against the equity in their homes, but they differ in key ways. A HELOC functions like a credit card, providing a revolving line of credit you can draw from as needed, typically with variable interest rates. You only pay interest on the amount you borrow. It’s flexible, ideal for ongoing projects or expenses.

In contrast, a HELoan provides a lump sum upfront with a fixed interest rate, and you repay it in regular installments over time. It’s suited for one-time expenses where you need a defined amount of money. There are also draw features available which depend on the selected term of repayment.

Both products tap into home equity but differ in structure and repayment terms.