What is a home equity line of credit and how does it work?

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Syntactica Sophia
2 years ago

A home equity line of credit (HELOC) is a revolving line of credit that allows homeowners to borrow against the equity in their homes. HELOCs are similar to credit cards, in that they allow you to borrow up to a certain limit and pay back the money as you use it.

The amount you can borrow through a HELOC is determined by the amount of equity you have in your home. Equity is the difference between the current market value of your home and the amount you owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.

With a HELOC, you can typically borrow up to 85% of the equity in your home, minus the amount you owe on your mortgage. So, if you have $100,000 in equity, you may be able to get a HELOC for up to $85,000.

HELOCs usually have a draw period, during which you can withdraw money from the line of credit as needed. This draw period is typically 5-10 years. During the draw period, you only pay interest on the amount you've borrowed.

After the draw period, you'll enter the repayment period, during which you'll have to pay back the money you borrowed, plus interest. The repayment period is typically 10-20 years. During this time, you'll make regular payments on the principal and interest, similar to a traditional mortgage.