A HELOC, or Home Equity Line of Credit, is a revolving credit line secured by the equity in your home. It allows homeowners to borrow money as needed, repay it, and borrow again, much like a credit card but typically at lower interest rates.
How It Works
The lender approves a maximum borrowing limit based on the home’s value and the amount of equity you have. You can draw funds up to this limit during the 'draw period' (often 5–10 years). After this, the repayment period begins, when you must pay back the borrowed balance plus interest.
Key Features
- Revolving credit: Borrow, repay, and borrow again within your limit.
- Variable interest rates: HELOCs often have rates that can rise or fall with the market.
- Secured by home equity: The home is collateral, meaning missed payments could risk foreclosure.
- Flexible use: Funds can be used for renovations, education, debt consolidation, or other expenses.
Benefits and Risks
The main benefit of a HELOC is flexibility—you only pay interest on the amount you use, not the entire credit limit. However, the risks include variable interest rates that can increase costs, and the fact that your home is at risk if you cannot repay.
Final Thoughts
A HELOC can be a powerful financial tool when used responsibly, offering access to low-cost credit for important expenses. Still, it should be managed carefully to avoid taking on debt that could jeopardize your home.