What Exactly Is a HELOC?

A HELOC is a home equity line of credit. Equity in a property is the difference between its market value and what you owe on it.

For example, a homeowner who has a property worth $150,000 and has a mortgage balance of $120,000 has $30,000 of equity in the property. To access some of this equity for your own use, you could look into taking out a HELOC.

A HELOC is a mortgage, separate from the one you may already have. To get one, you would go through a similar process as you would for a traditional mortgage. Income, assets, and credit are all considered.

Common uses for HELOC funds include home improvements and college tuition. Because it is a line of credit, as opposed to a loan, a HELOC works more like a credit card.

As with a credit card, you are able to purchase items and then pay down the balance over time. As you reduce that balance, you are then able to borrow the same money again and again.

While they operate in a similar fashion, HELOCs offer two advantages over credit cards. The first is a lower interest rate. The second concerns taxes. Often, the interest paid on a HELOC is tax-deductible.

The HELOC is a line of credit, which is different from a home equity loan. The equity loan has a fixed payment over time.

With a HELOC, the interest rate can fluctuate, so the payment amount can also change. This means that your qualifying income must be high enough that you can make the payments when they are high.

Interest rates are also typically higher on HELOCs than they are on fixed-rate mortgages. This is because, in the case of default, the first mortgage lender will get paid back first. This puts more risk on the HELOC lender.

For additional information on HELOCs, contact your mortgage professional.