What is a HELOC?

A Home Equity Line of Credit, or HELOC, is a type of mortgage that grants you access to funds based on your home's value. A HELOC could be the right option if you need help financing a house renovation, paying for school tuition, or other significant expenses. Similar to using a credit card, you can withdraw funds from a HELOC and choose to repay it in whole or some of it every month.

It also allows you to leverage the ownership stake you have built in your home, allowing you to borrow against it. By tapping into your accumulated equity, a HELOC offers practical and accessible means of obtaining funds necessary to fulfill your financial needs. When searching for a loan, it is also important to remember that utilizing the equity in your home often leads to obtaining the best interest rates.

How does a HELOC work?

A HELOC is a secured loan where the borrower offers an asset as collateral. In the case of a HELOC, the borrower's home acts as the collateral. This assures lenders that they can recover at least a portion of their investment if the borrower defaults. Having collateral increases the likelihood of loan approval as long as borrowers meet basic qualifications. Additionally, HELOCs may offer lower interest rates compared to other loan types.

Regarding borrowers' experience, HELOCs are very similar to credit cards. However, a HELOC establishes a line of credit that the borrower can use but is not obligated to use up to the established credit limit. Borrowers then repay the borrowed amount and the associated interest. Using a HELOC for significant expenses and relying on credit cards for everyday purchases is generally advisable.

This flexibility allows homeowners with a HELOC to use the funds only when necessary. This stands in contrast to many traditional loans, where a lump sum is disbursed, and the borrower must immediately start repaying both the principal and interest.

HELOCs typically include a draw period of several years, during which the borrower can utilize the line of credit as needed and is usually only required to make interest payments. The draw period is followed by a repayment period lasting several years. Throughout this time, borrowers are responsible for paying back the original amount borrowed and any interest accrued.

How much can you borrow?

The maximum amount you can borrow through a Home Equity Line of Credit depends on your home's value, the percentage of that value that lenders allow you to borrow against, and the remaining balance on your mortgage. You can estimate your potential HELOC borrowing capacity by performing two quick calculations:

Multiply your home's current value by the percentage of its value that lenders permit you to borrow. The result will be the maximum amount of equity that could be borrowed.

Subtract the remaining balance on your mortgage from the maximum amount of equity that could be borrowed. This will give you the total amount you can potentially borrow.

Home Equity Lines of Credit (HELOC) offers homeowners a powerful financial tool that has flexibility and allows them to access funds. By leveraging the home equity, individuals can access these funds based on their property's value and benefit from potentially lower interest rates than other types of loans. Additionally, the extended draw period and structured repayment phase allow borrowers to manage their finances effectively. Whether for home improvements or unexpected costs, a HELOC offers homeowners a convenient and cost-effective way to access the equity in their homes and meet their financial goals.