What is a Home Equity Line of Credit?

A HELOC acts like a credit card tied to your home’s equity, offering a revolving credit line for significant home expenses. Keep in mind this type of loan uses your home as collateral, which carries risks.

Benefits of HELOCs.

HELOCs’ annual percentage rate (APR) can be very close to (and even higher) than current mortgage rates, but this APR is often lower than many other available credit line options. Additionally, a HELOC is a separate loan from the existing mortgage, meaning the homeowner’s interest rate on the home loan does not rise as it does with a cash-out refinance.

How HELOCs Work.

HELOCs have two phases: the initial draw period (around 10 years) and the payment period (about 20 years). During the draw period, you can borrow from your credit line as needed. The repayment phase requires repaying borrowed funds along with contracted interest. Some HELOCs may demand an initial withdrawal of a set minimum sum.

How to quality for a HELOC.

For a HELOC, your available home equity should surpass your outstanding mortgage. Generally, you can borrow up to 85% of your home’s value minus your mortgage. Lenders assess factors like credit score, history, income, and debts, similar to your initial mortgage application.