Home Equity Line Of Credit (HELOC)
Definition
A HELOC, or Home Equity Line of Credit, is a revolving credit line secured by the equity in the your home, allowing you to borrow money as needed.
Detailed Explanation
A Home Equity Line of Credit (HELOC) is a financial tool that homeowners can use to borrow against the equity they have built up in their property. Unlike a traditional home equity loan that provides a lump sum of money, a HELOC works more like a credit card, providing a line of credit that the homeowner can draw from as needed.
The amount of credit available in a HELOC depends on the home’s appraised value, the amount of remaining mortgage, and other lender criteria. Interest is charged only on the amount drawn, not on the total line of credit available. HELOCs typically have a draw period, during which the borrower can access the funds, followed by a repayment period where the borrowed amounts must be repaid.
HELOCs are often used for home renovations, or funding major expenses like education or medical bills. The interest rates are lower than credit cards and most personal loans because the loan is secured by the home, but if you default on a HELOC, it could lead to foreclosure.
Example
Susan owns a home valued at $300,000 and has a remaining mortgage balance of $200,000. She applies for a HELOC and is approved for a credit line of $40,000 based on her home equity. She decides to use $20,000 from her HELOC to remodel her kitchen. She only pays interest on the $20,000 she has used, not on the entire $40,000 available.
Key Articles Related To HELOCs
Related Terms
Appraisal: The evaluation of a property's market value performed by a qualified appraiser.
Equity: The difference between the market value of a property and the amount still owed on its mortgage.
Foreclosure: The legal process by which a lender takes control of a property, evicts the homeowner, and sells the home after the homeowner fails to make full principal and interest payments on their mortgage.
Repayment Period: The phase following the draw period in a HELOC during which the borrower must repay the borrowed funds.
FAQs
What happens during the draw period of a HELOC?
During the draw period, the borrower can withdraw funds up to the credit limit and make payments toward the interest only or both principal and interest, depending on the loan terms.
Can I renew my HELOC after the draw period ends?
Some lenders may allow you to renew the HELOC, but this typically requires a new application and approval process.
How does a HELOC affect my credit score?
A HELOC can impact your credit score in various ways. Opening a HELOC increases your total available credit, which can improve your credit utilization ratio—a key factor in your credit score. However, large balances or missed payments can negatively affect your score.
Editor: Colin Graves
