A Home Equity Line of Credit (HELOC) allows you to access cash from your home’s equity – the difference between your home’s value and the amount you owe.
A HELOC is a revolving line of credit. Much like a credit card, you can use up to the maximum amount. During the draw period, typically 10 years but sometimes longer, the HELOC has a variable interest rate and low minimum payment based on how much you owe. At maturity, a HELOC usually converts to a fixed-rate loan payable over the remaining term.
HELOCs can pay for anything from home repairs to college tuition to consolidating high-interest debt. There are no restrictions on how you use the funds. Homeowners often set them up as a reserve to access only if an emergency or opportunity arises.
HELOCs offer an alternative to refinancing, particularly if you want to keep your current mortgage rate. They typically come with lower initiation fees and a faster start up than a refinance. You may be able to access more of your equity than with a primary mortgage loan. Tax advantages may be available when funds are used for home improvements.
HELOC interest rates are based on the prime rate, which can fluctuate, so there’s a risk of higher rates and payments. Home values typically trend upward over time. However, if housing prices drop before you get ready to sell of refinance, you could end up owing more than your home’s value.