A home equity line of credit (HELOC) is a type of loan that allows homeowners to borrow money using their home's equity as collateral. Equity refers to the portion of the home's value that the homeowner actually owns, which is calculated by subtracting any outstanding mortgage balance from the home's current market value.
The interest rates on HELOCs are usually variable, meaning they can fluctuate over time. The rate is often tied to a benchmark such as the prime rate. During the draw period, you typically only pay interest on the amount you've borrowed. After the draw period ends, a repayment period begins, during which you may have to start making principal and interest payments.
HELOCs are considered revolving lines of credit, similar to credit cards. This means that as you pay back the borrowed amount, the credit becomes available to use again. For example, if you have a $50,000 HELOC and you borrow $10,000, you would have $40,000 remaining to borrow.
Homeowners can use HELOC funds for various purposes, such as home renovations, debt consolidation, education expenses, or unexpected financial needs.
