A home equity line of credit can be a flexible option for those who need ongoing access to funds, but should be used carefully to avoid overborrowing.
What is a home equity line of credit?
A home equity line of credit (HELOC) is a type of revolving credit that homeowners can use to borrow against the equity in their home. Equity is the difference between the current market value of the home and the outstanding balance of the mortgage.
Key features of a HELOC
01. Credit limit
The lender sets a maximum amount you can borrow based on a percentage of your home’s appraised value, minus what you owe on your mortgage.
02. Revolving credit
Like a credit card, you can borrow, repay, and borrow again up to your credit limit during the “draw period.”
03. Draw period and repayment period
Draw period: This is the initial phase of a HELOC, usually lasting 5–10 years. During this time, you can borrow money up to your credit limit and only need to pay interest on the amount you’ve borrowed (though some HELOCs may require partial principal payments too).
Repayment period: After the draw period ends, the HELOC transitions into the repayment period, which typically lasts 10–20 years (sometimes longer). During this time, you can no longer borrow additional funds, and you must repay both the principal and interest, usually in monthly installments.
04. Interest rates
Most HELOCs have variable interest rates tied to a benchmark like the prime rate, which means your monthly payments can fluctuate. Some lenders may also offer fixed rates.
05. Secured by your home
Since the loan is secured by your home, failure to repay could result in foreclosure.
Common uses for a home equity line of credit
- Home improvements or repairs
- Debt consolidation
- Education expenses
- Emergency funds
HELOCs and debt consolidation
A home equity line of credit may be a good option for consolidating other high-interest debt because the interest rate is typically lower than those charged on a credit card. However, most HELOCs are adjustable-rate loans, meaning if interest rates go up, your monthly payment and the cost of borrowing will go up.
Pros and cons of using a HELOC
Pros
- Access to funds as needed
- Lower interest rates compared to credit cards or personal loans
- Potential tax deductions on interest (depending on how the funds are used)
Cons
- Risk of losing your home if you can’t repay
- Variable interest rates can make payments unpredictable
- Fees for appraisal, origination, or annual maintenance
Summary
A home equity line of credit (HELOC) is a type of revolving credit that homeowners can use to borrow against the equity in their home. HELOCs can be a flexible option for those who need ongoing access to funds but should be used carefully to avoid overborrowing.
We’re HELOC experts
Trying to navigate HELOCs, home equity loans, and mortgage refinancing can get complicated, so it’s important to work with a broker who can access multiple programs and current information. If you think a home equity line of credit might be a good fit for you, Network Mortgage can help. We can clear away the jargon, review your options, and help you find the best loan for your situation.