HELOC: Home Equity Line Of Credit

What is a home equity line of credit (HELOC)?

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A home equity line of credit (HELOC), is a pool of credit you can draw from using your home equity as collateral. Your home equity is the difference between the value of your home and the mortgage balance. So if your home is valued at $250,000 and your mortgage is $150,000 then your home equity is at $100,000 ($250,000-$150,000).  

Home equity loans are a revolving line of credit, a lot like credit cards. They also come with their own credit cards or checks, which are issued by the home equity lender. You will be allowed to draw from this pool of funds multiple times within the limit. The pool of funds can be replenished if you pay off the debt. The credit line is available for a limited amount of time, usually around 10 years.

It is an attractive source of funds because the interest rate is usually lower than other unsecured credit loans. The interest rate is usually a variable rate, which means it can go up or down. Home equity lines of credit are more suited for large expenses that require funding in stages, that way you only pay interest on what you would have used like renovations or college.

How does a home equity line of credit work?

A home equity line of credit uses what you own of the house as collateral for a revolving credit. The loan amount is based on your home equity, which is the value of your home minus the debt attached to it. 

Home equity credit lines are available through home equity lenders. After determining the available home equity,  the lender will look into your credit score, debt to income ratio, savings and other factors to determine the terms of the loan. The home equity lender will issue you a special checkbook or credit card to access the funds.

Home equity credit lines have a variable interest rate and a period within which the funds are available. They are a cheap source of funds because the loan will be secured by your home. This is why home equity loans have lower rates than credit card or business credit lines. The interest payments on a home equity credit line may be tax deductible, so consult your tax advisor.  

You may draw from this credit line as many times as you like, as long as it’s within the credit limit amount and available periods.  If you pay off part of the debt it replenishes the credit available and you can draw from it again. Home equity lines of credit are valid for a draw period which is usually 10 years and thereafter the payment of the debt (interest and principal) starts, which could be a term of 20 years. You will be required to make payments during the draw period but these are usually small interest-only payments.

If you'd like to learn more about accessing a home equity line of credit, just fill out the form below and one of our home.loans specialists will get in touch.