HOME EQUITY
LINE OF CREDIT
Refinance

A Home Equity Line of Credit (HELOC) is a type of loan that functions similarly to a credit card, allowing you to borrow funds as needed up to a specified limit. Your monthly payments will be based on the amount you’ve borrowed, and you can repay the balance and reuse the credit line for several years.

HELOCs are considered a type of second mortgage, meaning you can obtain one even if you still have a first mortgage on your home. In the event of foreclosure, the HELOC would be repaid second, after your primary mortgage. This means that your primary mortgage must be repaid first, and the proceeds from the sale of your home would be used to satisfy that debt before any payments are made on the HELOC.

To qualify for a Home Equity Line of Credit (HELOC), you must have available equity in your home, meaning the amount you owe on your home is less than the value of your home. Typically, you can borrow up to 85-90% of the value of your home minus the amount you owe. Lenders also consider your credit score and history, employment history, monthly income, and monthly debts, similar to when you first obtained your mortgage.

HELOCs have variable interest rates, which means the rate can change from month to month. The variable rate is determined by an index, such as the U.S. Prime Rate, plus a margin set by the lender. This margin remains constant throughout the life of the line of credit. As you borrow money from your HELOC, you’ll receive monthly bills with minimum payments that include principal and interest. Payments may fluctuate based on your balance and interest rate changes.

When you have a Home Equity Line of Credit (HELOC), you can access funds up to your credit limit at any time during the draw period, which is the time you can borrow money. The draw period can last for several years, such as 10 years. To withdraw funds, you’ll typically use special checks or a credit card provided by the lender, allowing you to borrow money as needed during the specified period.

After the draw period of your Home Equity Line of Credit (HELOC) ends, you’ll no longer be able to borrow additional funds. Instead, you’ll enter the repayment period, during which you’ll need to repay the entire outstanding balance. Your lender may establish a repayment schedule, which can span several years, such as 10 or 20 years. During this period, your monthly payments will typically be significantly higher than during the draw period.

A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows homeowners to borrow against the equity they have built up in their home. Unlike a traditional mortgage or home equity loan, which provides a lump sum, a HELOC functions more like a credit card, giving homeowners flexible access to funds as needed up to a pre-approved limit. HELOCs are often used for home improvements, debt consolidation, education expenses, or as a financial cushion for unexpected costs.

Credit Limit Based on Equity
The HELOC credit limit is based on a percentage of the home’s appraised value, minus any remaining mortgage balance. Many lenders allow borrowers to access 60-85% of their home equity.

Two Phases – Draw and Repayment
A HELOC typically has two phases, the draw period and the repayment period. During the draw period, which often lasts 5-10 years, homeowners can borrow and repay funds as needed. After the draw period, the loan enters the repayment phase, during which the outstanding balance must be repaid, typically over 10-20 years.

Variable Interest Rates
HELOCs usually have variable interest rates, which are tied to a financial index (like the prime rate) and can fluctuate. This means monthly payments can vary based on interest rate changes, potentially impacting affordability.

Interest-Only Payments During Draw Period
During the draw period, many HELOCs allow borrowers to make interest-only payments, making it affordable in the short term. However, when the repayment phase begins, payments include both principal and interest, which can increase the monthly amount due.

Withdraw Funds as Needed
Homeowners can access their line of credit in portions or all at once, depending on their needs. This flexibility makes HELOCs ideal for projects or expenses that occur over time, like a home renovation.

Revolving Credit
As with a credit card, any repaid amount becomes available again during the draw period, giving borrowers continued access to funds up to their credit limit.

Closing Costs and Fees
HELOCs typically have lower upfront costs than home equity loans, but there may still be fees for origination, appraisal, and annual maintenance.

Possible Early Closure Fees
Some lenders charge a fee if a HELOC is closed within a certain time frame after opening, usually to recoup administrative costs.

Secured by Home Equity
A HELOC is a secured loan, meaning the home serves as collateral. If the borrower defaults, the lender has the right to foreclose on the home, making timely payments essential.

Risk of Over-Borrowing
Because a HELOC allows flexible borrowing, it’s important for homeowners to manage debt responsibly to avoid over-borrowing against their home equity.

Uses for a HELOC
– Home Improvements
– Debt Consolidation
– Emergency Funds

Interest Deduction
Interest paid on a HELOC may be tax-deductible, but only if the funds are used for home-related expenses. Under the Tax Cuts and Jobs Act, borrowers can deduct interest only if the HELOC is used to “buy, build, or substantially improve” the home that secures the loan.

Is a HELOC Right for You?
A HELOC offers flexible access to funds for homeowners with available equity who need ongoing financial support for various expenses. While it can be a valuable tool, it’s important to weigh the risks associated with variable interest rates, the requirement of using the home as collateral, and potential payment increases during the repayment phase. Homeowners should assess their financial situation, consider the potential tax benefits, and create a plan for repayment before committing to a HELOC.