The Basics of Home Equity Lines of Credit (also known as HELOCS)

You might think that the only way to get money out of your home is to sell it, but that’s not the case. There are ways to leverage your home for financial gain without selling, including a home equity line of credit, more commonly known as a HELOC.

So, what, exactly, is a HELOC, and, as a homeowner, is it a wise financial choice?

A recent article from realtor.com answered common questions about HELOCs, including:

What is a HELOC? As mentioned, HELOC stands for home equity line of credit, which allows you to borrow money using the equity in your home as collateral. HELOCs are actually more like credit cards than traditional loans. When you get a HELOC, you can borrow as much (or as little) as you want on an as-needed (up to the credit limit) for the entire term of the loan, which generally falls between 5 and 20 years.

How much can you borrow with a HELOC? Generally, HELOCs allow you to borrow between 75 percent and 85 percent of your home’s value minus the balance of your mortgage. So, for example, let’s say your home is valued at $550,000 and you have a mortgage balance of $300,000. In that scenario, you have $250,000 of equity in your home, and would most likely be able to borrow between $187,500 (75 percent) and $212,500 (85 percent). Also, it’s important to note that interest rates on HELOCs are adjustable, which means that your interest payment may increase or decrease based on market conditions.

How do you spend your HELOC? While HELOCs function similarly to a credit card, you don’t want to use them like a credit card — for example, to cover everyday expenses. Instead, you would use your HELOC to cover major home renovations, or if you find yourself with a large, unexpected expense that you don’t have the cash to cover.

What’s Your Home Worth!

Find out how much your home or real estate property is worth. Get Your FREE Home Market Analysis Report Right Now!