Home Equity Lines of Credit
A HELOC (Home Equity Line of Credit) is a revolving credit line secured by your home equity. Unlike a lump-sum home equity loan, you can borrow, repay, and borrow again during the draw period (typically 10 years). HELOCs work like credit cards secured by your home, offering flexibility to tap equity as needed for home improvements, debt consolidation, or major expenses.
Lenders typically allow borrowing up to 85% of home value minus your mortgage balance. For a $400,000 home with a $250,000 mortgage, you could access up to $90,000 (85% of $400,000 = $340,000 minus $250,000 mortgage). During the draw period, you usually make interest-only payments. After draw period ends, you enter repayment period (typically 20 years) where you pay principal and interest.
HELOC rates are usually variable, tied to prime rate, making payments unpredictable. In rising rate environments, your payment can increase significantly. HELOCs offer tax-deductible interest if used for home improvements (not for other purposes after 2017 tax law changes). The risk: your home is collateral, so defaulting could mean foreclosure. Only borrow what you can afford to repay.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
HELOCs are revolving credit lines with variable rates and interest-only payments during draw period. Home equity loans provide a lump sum with fixed rates and fixed payments. HELOCs offer flexibility; home equity loans offer predictability.
Legally, anything. Commonly used for home improvements (interest is tax-deductible), debt consolidation, emergency expenses, or major purchases. Avoid using for discretionary spending - your home is collateral.
Typically 10 years where you can borrow, repay, and borrow again up to your limit, making interest-only payments. After draw period ends, you can't borrow more and must repay principal over the repayment period (typically 20 years).
Yes, lenders can freeze or reduce your line if your home value drops significantly, your financial situation deteriorates, or during economic crises. This happened to many borrowers in 2008-2009.
HELOCs are better for ongoing expenses or uncertain amounts (home renovations, education). Cash-out refinancing is better for large, one-time needs and when current mortgage rates are favorable. HELOCs have lower closing costs.