A home equity line of credit (HELOC) is a loan that allows homeowners to borrow against the equity in their homes. It functions like a credit card, with a set credit limit, variable interest rate, and draw and repayment periods.
A home equity line of credit (HELOC) is a type of loan that allows a homeowner to borrow money against the equity in their home. It works like a credit card, where the borrower has a set credit limit and can borrow and repay funds as needed. The amount that can be borrowed is determined by the difference between the current market value of the home and the outstanding mortgage balance.
For example, if a homeowner's house is valued at $300,000 and they still owe $200,000 on their mortgage, they may be able to obtain a HELOC with a credit limit of $50,000. The homeowner can then borrow money from this line of credit and use it for purposes such as home improvements, debt consolidation, or other expenses.
The interest rates on a HELOC are typically variable and tied to a benchmark rate such as the prime rate. The borrower usually has a draw period during which they can access funds from the line of credit, typically 5-10 years, followed by a repayment period, which is when they must start repaying the borrowed amount.