What Is a Home Equity Line of Credit?



A HELOC can make accessing funds you need on an ongoing basis quick and easy.

Life has a way of throwing you curveballs that can cost money, perhaps quite a bit of it. Scrambling to come up with the cash to cover these sudden expenses can take time you may not have, and can add more anxiety to what may already be a stressful situation. A helpful resource for covering those unexpected expense—as well as major projects that require an infusion of funds—is a home equity line of credit.

Home equity line of credit basics

A home equity line of credit, commonly referred to as a HELOC, is a type of secured loan available to property owners. As the name implies, you are getting a loan based on the equity of your home. Equity is calculated by taking the current value of your home and subtracting any existing mortgages, liens or other liabilities against the property. The property serves as the collateral that secures the loan.

People often take out a HELOC as a second mortgage, but if you don’t already have an existing mortgage on your home, your HELOC which would then occupy the first mortgage spot in the hierarchy since there are no senior loans above it.

You can take a HELOC to finance a wide range of things, or simply to have a safety net that will be available in case of an emergency or unplanned expense. It is common for property owners to use a HELOC for home renovations, repairs or upgrades. This can be a smart move if those improvements increase the value of your home, making the HELOC an investment that can pay off in a profitable way.

Upsides of a HELOC

An advantage of a HELOC is that the interest rate tends to be relatively low, but the adjustable rate means you must be prepared for the rate to fluctuate. The interest you pay on a HELOC is usually tax deductible, up to a certain amount. Also, you only need to go through the application and approval process once, at the initial start of the process. After that, you will always have that credit—available for quick accessibility in case of emergency—without having to go through another application. You only owe based on the amount you have used, although some lenders do charge an annual fee for a HELOC regardless of what if any amount you have borrowed.

A source of recurring funds

Unlike a typical mortgage, which is an installment loan, a HELOC is structured as a revolving line of credit. That means it functions in a similar manner as a credit card, where you can draw from (in other words, borrow against) the loan up to the established credit limit. Making payments on your balance frees up more available credit, so you can keep reusing that credit over and over via a cycle of drawing on it and then paying towards the balance (or paying off the balance completely).

HELOC dollars and cents

HELOC interest rates are tied to the Prime Rate (called the index) plus a margin. The margin is a markup or added fee charged by the lender, and can depend on a number of factors including your credit