What is a Home Equity Line of Credit?
A Home Equity Line of Credit, or HELOC, uses your home equity as collateral. A HELOC offers a line of credit from which you can draw as needed, as opposed to a typical home equity loan which gives you the entire amount of the loan up front. You can pull money from your line of credit during a specified “draw period” (usually between 5 and 25 years), paying back only the money you use plus interest.
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When this draw period ends, you repay the loan’s principal either in one lump sum or according to a payment schedule. Since your home provides collateral for the loan, failure to honor a repayment agreement could result in foreclosure. Since the interest rate on a HELOC is tied to economic indexes such as the prime rate, it is variable and will change over the life of your loan.
Why Choose a HELOC?
A home equity line of credit is a popular choice for borrowers because they:
- Offer large amounts of cash at relatively low interest rates
- May allow you to deduct the interest paid from your taxes, depending on your specific financial situation
- Can be a flexible way to borrow on demand and repay on your own schedule
How to Get a HELOC
Getting a HELOC is similar to getting a first mortgage, but less rigorous and time-consuming. However, you shouldn’t rush the research before signing on the dotted line. Consult with a variety of lenders to make sure you’re getting the lowest rates you can, being sure to compare the annual percentage rate (APR), which tells you the cost of credit on a yearly basis. While shopping around, make sure you also compare other associated loan expenses such as points and closing costs.