Introduction: Homeowners who have built equity in their homes may want to consider a home equity line of credit, or HELOC, as a way to access that equity. HELOCs can be a flexible source of funds for home improvements, debt consolidation, or other expenses. In this article, we’ll take a closer look at what a HELOC is and how it works.
A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loansFootnote1 such as credit cards. A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax deductible. Please consult your tax advisor regarding interest deductibility as tax rules may have changed.
How a HELOC works
With a HELOC, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. This means you can borrow against it again if you need to, and you can borrow as little or as much as you need throughout your draw period (typically 10 years) up to the credit limit you establish at closing. At the end of the draw period, the repayment period (typically 20 years) begins.Footnote2
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What is a Home Equity Line of Credit (HELOC)? A home equity line of credit, or HELOC, is a type of loan that allows you to borrow against the equity in your home. Equity is the difference between the value of your home and the amount you still owe on your mortgage. With a HELOC, you can borrow money up to a certain limit, and you only pay interest on the amount you borrow.
How Does a HELOC Work? A HELOC is a revolving line of credit, which means that you can borrow and repay funds as needed, up to your credit limit. The repayment terms of a HELOC vary, but typically you’ll have a draw period, during which you can borrow funds, and a repayment period, during which you’ll need to repay the borrowed amount plus interest.
During the draw period, which typically lasts 5-10 years, you can borrow funds up to your credit limit. You’ll make payments on the interest and principal during this period, but you’ll only need to pay interest on the amount you borrow.
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After the draw period ends, you’ll enter the repayment period, which typically lasts 10-20 years. During this period, you’ll need to repay the principal plus interest on the amount you borrowed. Your payments may increase during the repayment period, as you’ll need to repay the principal.
Why Get a HELOC? HELOCs can be a good option for homeowners who have built equity in their homes and need access to funds for home improvements, debt consolidation, or other expenses. HELOCs typically have lower interest rates than credit cards or personal loans, and the interest paid on a HELOC may be tax-deductible.
Conclusion: A home equity line of credit, or HELOC, can be a flexible source of funds for homeowners who have built equity in their homes. With a HELOC, you can borrow money up to a certain limit and only pay interest on the amount you borrow. If you’re considering a HELOC, be sure to compare rates and terms from multiple lenders to find the best option for your needs.