HELOC (Home Equity Line of Credit)
A revolving credit line secured by your home's equity - borrow, repay and borrow again during the draw period.
A revolving credit line secured by your home's equity - borrow, repay and borrow again during the draw period.
A HELOC uses the gap between your home's value and what you owe as collateral for a line you can draw from repeatedly, much like a credit card with a much lower rate and your house behind it. Most have a ten-year draw period where you pay interest only on what you have actually borrowed, followed by a twenty-year repayment period where the line freezes and the balance amortises - the payment shock in that second phase is the feature people underestimate.
Because the home secures the line, closing costs, appraisal requirements and rate structures decide the real price: most HELOCs float with prime, so a draw taken at 8% can reprice to 11% without anyone renegotiating. Some lenders let you convert a draw to a fixed tranche. Lenders also cap the combined loan-to-value you can reach - commonly 85% - and treat a HELOC you may never draw as a liability when you later apply for a mortgage.
Worked example
A $500,000 home with a $300,000 mortgage has $200,000 of equity; at an 80% combined cap the usable line is $100,000. Drawing $40,000 during the interest-only period costs interest on $40,000 - until repayment begins and the full line's terms convert to principal-and-interest.
Related terms and tools
Amortization, Home affordability calculator, Debt consolidation
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