What is a HELOC?
A home equity line of credit, or HELOC, is a revolving credit line that you can borrow from on demand.
A lender will approve you for a specific amount of money — determined by the value of your home and your credit score — for a specific amount of time. You may be able to borrow up to 85% of the value of your home.
During the initial "draw period," you can borrow money or pay off your balance whenever you want, and you'll only pay interest on the amount you're actually borrowing.
If you're still borrowing money at the end of the draw period, you enter the repayment period. You won't be able to borrow more money, and you'll begin paying down the amount you’ve used, plus interest.
Your lender will use a benchmark interest rate — such as the prime rate — to determine the interest rate of your HELOC. Because it's backed by your home, expect that rate to be a lot lower than other borrowing options, like credit cards.
Is a HELOC right for you?
What’s great about a HELOC is that you only borrow what you need, and you can do so at any point during the draw period. There’s no obligation to use that money if you don’t need it, but it can provide you with fast cash in a pinch.
Your interest payments may even be tax deductible depending on how you use the money. While lenders won’t restrict your options, choosing to put your funds toward improving your home can get you some tax benefits.
Keep in mind, because a HELOC comes with a variable interest rate, your monthly payments might increase if the prime rate goes up. Since your property is used as collateral on the loan, you could put your home at risk if you can't keep up with the payments.
The cost of a HELOC depends largely on the lender. Some HELOCs come without fees or closing costs, while others may have high fees and a balloon payment toward the end.
The trick to finding the best deal is knowing where to look.
More: HELOC vs. home equity loan
Tap your home equity with a HELOC
A HELOC is a great option for freeing up some cash, but doing the research to find a great rate and lender can be a slog.
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