HELOC (Home Equity Line of Credit)

HELOC (Home Equity Line of Credit) is a line of credit secured by the equity in your home. It works similarly to a credit card, but your house is used as collateral.

📌 What is a HELOC?

A HELOC (Home Equity Line of Credit) is a revolving line of credit that allows you to borrow against the equity you’ve built in your home.
Your home equity is calculated as follows:

Market value of the home – remaining mortgage balance = available equity

🧠 How it works

🟡 1. Draw period

• This is the period during which you can withdraw funds from the credit line.

• It typically lasts 5 to 10 years.

• You usually pay interest only on the amount you actually use, not on the total approved limit.

🔁 2. Revolving credit line

• Similar to a credit card: you can borrow and repay repeatedly during the draw period.

• When you repay part of the balance, that amount becomes available again.

🔻 3. Repayment period

• After the draw period ends, the loan enters the repayment (amortization) phase.

• You can no longer withdraw funds, and you must repay principal + interest.

• This period often lasts 10 to 20 years.

💵 How much can you borrow?

Lenders usually allow you to borrow up to a percentage of your home’s value, commonly:

🔹 Up to 85% of the home’s market value
🔹 Minus the balance of your existing mortgage

Example:

📊 Interest rates

📌 Variable rates
Most HELOCs have variable interest rates, typically tied to an index such as the Prime Rate + a margin.

📌 Fixed-rate options
Some lenders allow you to lock in a fixed rate on a portion of the balance.

✅ Advantages

✔ You borrow only what you need
✔ You pay interest only on the amount used
✔ Flexible use of funds (renovations, debt consolidation, education, etc.)
✔ Interest rates are usually lower than credit cards or personal loans

❌ Disadvantages and risks

⚠ Your home is used as collateral — failure to repay can lead to foreclosure
⚠ Variable rates may increase, raising your monthly payments
⚠ Possible fees: application, appraisal, annual fees

🧾 Common uses for a HELOC

• Home renovations or improvements

• High-interest debt consolidation

• Medical or education expenses

• Emergencies or investment opportunities

📌 Key differences compared to other products