How a HELOC works
A home equity line of credit, or HELOC, is a line of credit secured by the equity in your home, the difference between what your home is worth and what you owe on it. Instead of receiving one lump sum, you get a credit limit and borrow from it as you need to.
A HELOC has two stages. During the draw period, you can borrow, repay and borrow again, much like a credit card. When the draw period ends, the repayment period begins: you can no longer borrow, and you pay back what you owe. If you already have a mortgage, the HELOC is a second mortgage that you pay in addition to your first one.
When a HELOC can make sense
- Home improvements paid in stages, where you don’t know the final cost up front.
- Education costs that come due each semester.
- A backup for large expenses, so you can borrow only if you need to.
- Paying off higher-interest debt, if you have a plan to repay the balance.
Things to consider
- Your home is the collateral. If you can’t repay as agreed, you could lose your home.
- Your payment can change. Most HELOCs have a variable rate, and payments are often higher once the repayment period begins.
- Your line can be reduced. Lenders can freeze or lower your credit line if your home’s value falls significantly or your finances change.
- Ask about all the costs. Compare the rate, closing costs and any ongoing or early-closure fees, not just the starting rate.
- You have time to change your mind. For a HELOC on your main home, you generally have three business days after closing to cancel, called the right of rescission. You can draw funds after that period ends.
Not sure whether a HELOC, a home equity loan or a cash-out refinance fits best? Talk to a loan officer and we’ll compare them side by side.