What is a HELOC?

A home equity line of credit, or HELOC, can be a powerful financial tool that uses the equity in your home to provide you with a revolving line of credit that can be used for anything you need or want. When you open a home equity line of credit, you are essentially opening a credit card that taps into the equity of your home. You can take as little or as much of that credit line as you would like until you reach your limit.
There are many common uses of HELOCs that many homeowners across the United States use every day. The convenience of being able to make microloans against the equity in your home is ultra-convenient for do-it-yourself home improvement projects. For example, you can take out cash withdrawals from your HELOC as your home improvement projects progress. If you are doing a remodel, take out a microloan to pay for materials, then when you need to hire a plumber, you can take out another. Or, you can create a budget ahead of time, including the cost of the plumber, and simply take out one large sum to cover the entire project. HELOCs give an incredible amount of flexibility. For example, let us say that during your DIY bathroom remodel job you have an emergency car repair that you need to pay for, you can simply use some of the bathroom’s remodel funds to quickly pay for the emergency car repair, and then take out another microloan to cover the remaining costs of the remodel.
The credit limit that your HELOC contains is determined by the amount of equity you have in your home. Equity is essentially the difference between the real market value of your home and the balance of your mortgage. If this figure exceeds at least 20% of the total value of your home, you then could be eligible for a home equity line of credit through a mortgage lender. Most lenders cap the amount of equity that you can borrow against at around 80%, while others may let you borrow up to 85%. Although HELOCs are a powerful financial tool that can be used at your discretion, you still may want to be careful because a HELOC is a form of a secured loan. When you open a home equity line of credit, you are letting the mortgage place a lien on your home, and when the draw period closes and monthly payments are due, if you are unable to make the payments, you could be in jeopardy of losing your home.

HELOC is an acronym for a home equity line of credit. A home equity line of credit is a form of borrowing that allows you to borrow up to 80% of the equity in your home if the total equity in your home exceeds 20%. HELOCs are a secured form of borrowing that can be a powerful financial tool but it comes with their risks as well. You are essentially using your home as collateral to take out a new line of credit, and if you are unable to pay, you could be in danger of losing your home.

A typical HELOC may consist of a draw period and a repayment period. When you apply for the HELOC, the lender will set your credit limit at a particular amount and then allow you to “draw” against that amount for a draw period of up to 10-years. You can take out microloans from your home equity line of credit by writing checks, using a debit card, wire transferring money into your account, visiting an ATM, or by going into a physical branch. During this draw period, you may only be required to pay monthly interest payments or you may be able to make payments on the principal and pay off the loan balance in full. If you do pay off the balance in full, you then simply are opening up the funds in the line of credit similar to the way a credit card works. At the end of the draw period, your home equity line of credit closes, and then either the lender can have you renew the line of credit, or your HELOC turns into a regular loan with monthly payments. Common loan terms for HELOCs as the end of their draw period include 15 or 20-year loans.

The main benefits of a home equity line of credit include the fact that there are no closing costs, there are no fees for cash withdrawals, and that interest rates are typically lower than other forms of financing. Additionally, home equity lines of credit offer a form of financing that comes with great flexibility.

The main disadvantages of a home equity line of credit include the temptation to only make interest payments during the draw period resulting in either a large balloon payment at the end of the draw period, or once monthly payments start to kick in, and extremely high monthly payment. The other main disadvantage is the fact that you are using your home as collateral, and when those large monthly payments do kick in, if you cannot make them, you could be in jeopardy of losing your home.

Yes, a home equity line of credit turns into a normal loan at the end of the draw period. Common loan terms include 15 and 20-year loans. During the draw period, typically up to 10-years, borrowers may be required to make interest payments, however, they could also pay on the principal and/or pay off the entire balance.

If you have at least 20% equity built up in your home, most lenders will let you borrow up to 80% of your equity in the form of a home equity line of credit.

This really depends on the lender and the agreement that you have entered into, but typically, you are allowed to pay on the principal of the home equity line of credit and even pay it off completely. Any funds that are paid off can become available again during the draw period.

Generally yes, an appraisal may be needed for a new home equity line of credit, however, some lenders may waive the appraisal in certain circumstances.

Closing a home equity line of credit can reduce the amount of credit that one has available which can negatively impact their credit score. It can also lower the average age of accounts which can hurt a credit score as well.

If you open a home equity line of credit, you may be able to refinance your primary mortgage, however, you may have to receive special permissions from your HELOC lender or pay off the HELOC in full.