A Home Equity Line of Credit (HELOC) is a form of revolving credit in which your home serves as collateral. Here are the key things you should know about a HELOC:

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• Definition: A HELOC, home equity line of credit, allows you to borrow money against the equity you have in your home. Equity is the difference between the market value of your home and the amount you owe on your mortgage.    

• Revolving Credit: Similar to a credit card, a HELOC provides a line of credit that you can borrow from as needed, repay, and borrow again during the draw period.                                                                                                  

 

• Interest Rates: HELOCs have variable interest rates tied to an index (like the prime rate). This means your payments can fluctuate based on market conditions monthly.                                                                                              ​

• Draw Period and Repayment: HELOCs have two phases:
   

  • Draw Period: During this time (usually 10 years), you can borrow money up to your credit limit and only pay interest on the amount borrowed for the 10 year period and then the payback with principal and interest is required.
     

  • Repayment Period: After the draw period ends (10 years), you can no longer borrow money and must repay the outstanding balance, often over a 20 year period. Payments during this period are typically higher because they include both principal and interest. 
     

• Credit Limit: Your credit limit is determined by factors such as the amount of equity in your home, your income, credit history, credit scores, and the lender's criteria, such as debt to income (DTI).
                                                    

• Fees: HELOCs have fees which could include an application fee, appraisal fee, annual fee, origination fee, subordination fee or early closure fee. These can vary by lender.
   

• Risk: Since your home secures the HELOC, failure to repay the loan could result in foreclosure.
   

• Uses: HELOCs are often used for home renovations, debt consolidation, education expenses, or other major expenses where a large amount of money is needed at once or over time. The lender is not concerned with your usage of the funds, just your ability to pay back.
   

• Comparison Shopping: Compare terms, interest rates, fees, and repayment options from different lenders before choosing a HELOC.
   

• Tax Deductibility: In the United States (as of 2024), interest paid on a HELOC may be tax deductible if the funds are used to improve the home that secures the loan. However, tax laws can change, so it's essential to consult with a tax advisor.
   

Before applying for a HELOC, consider your financial situation, ability to repay the loan, and the potential risks involved.
 

Another consideration is choosing a second loan with a fixed rate. The payment is fixed over the term of the loan and includes principal and interest.

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