A HELOC is a home equity line of credit. It lets you borrow against part of the value of your home.
What it means
It works more like a credit line than a one-time loan. You may borrow, repay, and borrow again during a draw period, up to the limit.
The rate is often variable. Later, the line may enter a repayment period when new borrowing stops and payments change.
A simple example
A homeowner opens a $75,000 home equity line of credit and uses $20,000 for repairs. Interest is generally charged on the $20,000 used, not the full $75,000 limit. During the draw period, the owner may be allowed to repay and borrow again.
If the rate is variable, the payment can rise even when no more money is borrowed. When the draw period ends, new borrowing may stop and the payment may increase as repayment begins. Because the home secures the debt, a HELOC is not simply a large credit card. Failure to repay can put the home at risk.
What people often miss
The home is collateral. Failure to repay can put the home at risk.
A low starting payment may rise when rates change or when repayment begins.
Three questions worth asking
- How can the rate and payment change?
- When does the draw period end?
- What fees, limits, and early-closure charges apply?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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