HELOC — Home Equity Line of Credit

A HELOC is a revolving line of credit secured by your home. When you already have a first mortgage, it commonly sits behind that loan. You’re approved for a maximum draw amount; you can borrow what you need, pay it back, and draw again throughout the draw period.

A HELOC can preserve your existing first mortgage, but it is not automatically cheaper than a cash-out refinance. Compare rates, balances, repayment terms, fees and variable-rate risk.

HELOC options vary by lender, property and borrower profile, so available programs should be compared for the specific scenario. Underwriting requirements, lien position, fees, draw terms and fixed or variable features depend on the lender and program.

The available credit limit depends on the lender’s combined loan-to-value requirements, your existing mortgage balance and the rest of your application.

For illustration only, an assumed 85% combined loan-to-value limit on an $800,000 home with a $400,000 first mortgage would leave $280,000 for a HELOC. This is not a quoted or available credit limit.

• $800K × 85% = $680K assumed total mortgage debt
• Minus the existing $400K first
• = $280K hypothetical HELOC limit

Final limit depends on credit, income, and the lender’s overlays.

A HELOC normally has a draw period followed by a repayment period, although some agreements require a balloon payoff at the end of the draw period. During the draw period, the line is open and the borrower can take additional advances up to the available credit limit. A draw period might last 10 years, for example. Depending on the agreement, the required payment during that period might include principal and interest or may allow interest-only payments.

After the draw period ends, new advances generally stop and the remaining balance has to be repaid according to the agreement. If the agreement provides a repayment period, that transition can cause a significant payment increase even if the interest rate itself does not change. A balance that was previously receiving an interest-only or lightly amortizing payment may now have to be fully amortized over a defined number of years. Some HELOC agreements instead require a balloon payment.

For example, on an illustrative $100,000 balance at a hypothetical 8%, an interest-only payment would be about $667 per month. If that same $100,000 then had to amortize over 20 years at the same 8% rate, the principal-and-interest payment would be about $836 per month. The increase in that example comes entirely from beginning to repay principal. A variable-rate increase could push the payment higher still.

Most HELOCs have variable rates. The rate is generally determined from a published index plus a margin, so changes in the index can change the rate and payment. The agreement should also identify applicable rate caps or other limitations. Some HELOCs let the borrower convert part of the outstanding balance to a fixed rate, but the availability, conversion rate, fees and repayment terms are specific to that lender’s agreement.

That means the most important HELOC terms are not just the introductory rate and credit limit. A borrower should understand how long the draw period lasts, what payment is required while drawing, how the balance will amortize afterward, how the variable rate is calculated, whether a balloon is possible, and whether fixed-rate conversion is available.

• Renovations stretched over months or years — pay for each phase as it happens.
• Tuition spread over multiple semesters.
• If you want to use a HELOC while buying another home, confirm that the lender permits the proposed arrangement and how both properties and loans will be evaluated.
• Standby liquidity, subject to the agreement and possible freezes or reductions in available credit.
• Debt consolidation, after comparing total costs and considering the risk of securing the debt with your home.

A HELOC is secured by your home, so failure to repay can put the home at risk. The lender may also freeze or reduce available credit under certain conditions.