A HELOC stands for Home Equity Line of Credit. It is a type of revolving credit that allows homeowners to borrow against the equity in their homes. Equity is the difference between the current market value of the home and the outstanding balance of any mortgage or loans secured by the property.
With a HELOC, the homeowner is given access to a certain amount of credit based on the value of their home and other factors determined by the lender. The homeowner can borrow from this line of credit as needed, similar to using a credit card. The maximum borrowing limit is usually a percentage of the home’s appraised value, minus any outstanding mortgages.
HELOCs typically have two phases: the draw period and the repayment period. During the draw period, which usually lasts several years, the homeowner can borrow from the line of credit and only pay interest on the amount borrowed. Once the draw period ends, the repayment period begins, during which the homeowner can no longer borrow and must start repaying both principal and interest on the outstanding balance.
Interest rates on HELOCs are usually variable, meaning they can fluctuate over time based on changes in a benchmark interest rate, such as the prime rate. The interest rates may also have a cap or limit to protect borrowers from excessive rate increases.
HELOCs can be used for various purposes, such as home renovations, debt consolidation, education expenses, or other major expenses. It’s important to note that failure to repay the borrowed amount may result in foreclosure, as the home is used as collateral for the line of credit.