What Is a HELOC?

A HELOC Allows You to Borrow Against the Equity of Your House

A HELOC or "home equity line of credit" is a way of borrowing money against the value of your home. If your house is worth more than you owe on your mortgage, you may be able to use your home equity to pay for improvements, consolidate high-interest debt, or pay for college tuition.

How Does a HELOC Work?

HELOCs are credit lines that let you choose how much money you borrow, up to a certain limit, during a certain period of time. (This is often called the "draw period.") You don't need to take out a specific amount of money all at once with a HELOC, like you do with a cash out refinance or home equity loan.

Home equity lines of credit can be useful when you need to borrow varying amounts of money over a period of time. People might get a HELOC when they are making home repairs but don't know how much money they will need or when they will need it. People might also get a HELOC to pay for college tuition when different bills come due at different times.

Once you are approved for a HELOC, you will have a maximum amount of money you can borrow. HELOCs often have draw periods of 5 to 10 years, which means you can borrow money over the course of 5 to 10 years. Most of the time, lenders require you to maintain a certain amount of equity in the home. There may be other requirements, too.

How Do You Pay off a HELOC?

During a HELOC's draw period, you may only need to make interest payments on the money you borrow. After the draw period, you will need to make both principal and interest payments. Repayment periods can often run between 10 and 20 years. You'll need to pay off the full amount of the loan by the end of the repayment period.

The interest-only payments during the draw period can make the upfront costs of a HELOC more affordable. Keep in mind that HELOCs typically come with an adjustable interest rate. This means that the amount of your interest payments might go up or down during the life of your home equity line of credit.

Also, note that a HELOC uses your home as collateral. This means that if you have trouble making payments or default on your HELOC, you risk losing your home.

Is a HELOC Right for You?

You can also get cash from your home's equity with a cash out refinance or a home equity loan, as well as a HELOC. Learn more about the differences between HELOCs and cash out refinances.

Last reviewed and updated September 2024 by Freedom Mortgage.