A home equity line of credit, also referred to as a HELOC and often pronounced “heelock”, is a way for you to borrow money against your home.
However, just like any other loan option, there are rules and stipulations. Read further to learn just what those are.
What exactly is a home equity line of credit?
When you use your HELOC, you are borrowing money using the equity in your home as collateral. Some even refer to it as a “second mortgage”.
A home equity line of credit functions like a credit card because it allows you to borrow up to a certain amount on an as-needed basis over the term of the loan. This works for those who need to borrow funds but are not sure how much they will need.
Most homeowners tap into their equity to finance home improvement projects, pay for tuition, or afford a down payment on a second home.
How much can you borrow?
The rule of thumb is you can borrow up to 75% to 85% of your home’s appraised value, minus what you still owe on your mortgage.
So, let us say your home has been appraised at $200,000 and you still owe $100,000 on it.
Depending on what percentage your lender or bank abides by, you will be looking at anywhere between $150,000 – $170,000.
Subtract what you still owe, and you can expect to borrow up to $50,000 to $70,000.
Keep in mind that you can take out small amounts from this number over time. More than likely, your lender or bank will even give you a plastic card similar to a credit card.
Additionally, much like applying for a traditional mortgage, your lender will look at your debt to income ratio, ability to repay the loan, and your credit history.
Paying for a HELOC
Depending on the lending institution you borrow from, you have two common options. These options are either making interest-only payments until the term of the loan is up or paying a percentage of the principal as you go.
The good news is, you only pay interest on what you borrow, not the limit that the bank or lender has granted you.
These interest rates vary much like traditional loans. However, some lenders may offer a low introduction rate for the first few months.
Also, think of this line of credit as a revolving door. If you have been offered a HELOC of $15,000 and take out $5,000 to spruce up your bathroom, once you pay that back you will have $15,000 available to use again.
