What is a home equity line of credit?

Jan 27, 2017

If you’ve built up some equity in your current home and need some extra cash, then a home equity line of credit, or HELOC, might be right you.

A HELOC is a loan that is underwritten using your current home’s value. For example, if you’ve owned your home for 10 or so years, then you likely have a significant amount of equity, or money, invested in it. A HELOC essentially serves as a sort-of second mortgage, so the bank would give you a maximum loan amount for you to use based on the equity that you have in your home.

Going back to our 10-year ownership example, that maximum amount might be $50,000. Here’s how a HELOCs different than other loans…with a standard mortgage or loan, you’d be paid out an entire amount at closing. With a HELOC, a maximum amount is established based on your qualifications, credit history and needs, and then you may use as much, or as little, of that amount as you like. Unlike most other loans, the timing of accessing some, or all, of the funds is at your discretion. You could “draw” $10,000 from your HELOC for new appliances one year, and then “draw” another $3,000 the next year for a new paint job.
Photo of a house

HELOCs have a “draw period,” typically ranging from 5 to 10 years, during which time borrowers can access the funds. During the draw period, the borrower is only required to pay interest on those funds that they actually drew out and used. After the draw period closes, borrowers are required to pay off the HELOC, or refinance it to another loan, during the repayment period. Repayment periods typically range from 10-20 years.

Is a HELOC right for me?

HELOCs are convenient for funding intermittent needs, including:

  • Remodels and repairs
  • Educational costs
  • Energy-efficient appliances
  • A more fuel-efficient car
  • Medical Bills
  • Unexpected expenses

HELOCs are also beneficial because you’re only paying interest on the funds you actually use, so if you’re not sure how much money you’ll need to borrow for your remodel or college tuition, then a HELOC can be a good option. 

As with any loan, you’ll want to talk to a financial expert and be confident you can pay off the HELOC before establishing one. Remember, ultimately the goal of homeownership is to own your house free and clear, so if you’re unsure as to whether you can handle additional payments after the draw period, then you may want to explore other avenues of funding, or look at adjusting your existing budget.

Talk to your neighborhood loan officer to find out if a HELOC might be right for you and your project. (Just like other loans, all HELOCs are subject to credit approval.)