HELOC Loan
What is a HELOC loan?
A HELOC, or Home Equity Line of Credit, is a revolving line of credit that uses the equity in your home as collateral, similar to a credit card. You can borrow money as needed up to a specific limit during a “draw period,” repaying only the amount you use, plus interest. After the draw period, the loan transitions to a repayment period, where you pay back both principal and interest.
How it works
Collateral: A HELOC is secured by your home’s equity, which is the difference between your home’s value and the amount you still owe on your mortgage.
Line of Credit: It functions like a credit card, allowing you to borrow, spend, and repay as you go during the draw period, which can last up to 10 years.
Interest: You typically only pay interest on the amount you borrow, and the interest rate is often variable.
Repayment: After the draw period ends, the HELOC enters a repayment period, where you make payments on both the principal and interest.
Common uses
Home improvements, Education expenses, Debt consolidation, and Major purchases or medical costs.
Key considerations
Risk: Since your home is the collateral, you risk foreclosure if you are unable to repay the loan.
Variable Rates: HELOCs often have variable interest rates that can increase, potentially leading to higher payments.
Lender Criteria: To qualify, you’ll need sufficient home equity, a good credit score, stable income, and a good debt-to-income ratio, just like with a mortgage.
Two phases: A HELOC has two phases: the draw period, where you can borrow, and the repayment period, where you pay back the principal and interest.
