A home equity line of credit (HELOC) is a revolving type of secured loan in which the lender agrees to lend a maximum amount within an agreed period, where the collateral is the borrowers property. It is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt. Here are some key features of a HELOC:
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Collateral: The collateral of a HELOC is the home, which means that failure to repay the loan or meet loan requirements may result in foreclosure.
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Credit Limit: With a HELOC, you're borrowing against the available equity in your home, and the house is used as collateral for the line of credit. You can borrow as little or as much as you need throughout your draw period (typically 10 years) up to the credit limit you establish at closing.
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Repayment: After the draw period, you can no longer borrow from the credit line, and you're required to repay your remaining credit line balance. HELOCs can require repayment all at once or over time, with drawn-out repayment periods typically lasting 20 years.
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Qualification: To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe. Also, a lender generally looks at your credit score and history, employment history, monthly debt payments, and the value of the property you're securing the loan against.
It's important to note that a HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. A HELOC is often used for home repairs and renovations, which can increase the value of the home, but it can also be used for other expenses or to consolidate debt.
