A Home Equity Line of Credit, or HELOC (pronounced “hee-lock”), is a revolving line of credit that uses your home as collateral.
HELOCs can be used for almost any purpose, but tend to be used more for major expenses such as home remodeling, medical bills, education expenses and even car purchases. Because it is secured by your home’s equity, HELOCs often come with lower rates and higher credit limits than may be available with other lines of credit. The interest paid on a HELOC may be tax deductible as well (consult your tax advisor). On the other hand, because failure to repay a HELOC may cause you to lose your home, those shopping for HELOCs and other home equity products must weigh the benefits against the risks.
What makes Home Equity Lines of Credit different from Home Equity Loans is their flexibility. For example, while with a Home Equity Loan the borrower receives a specific lump sum of cash, with a Home Equity Line of Credit, the borrower is able to draw on the line of credit for whatever purpose arises. This flexibility makes HELOCs a good choice if you anticipate several large expenses over the length of time you plan on having the credit line available to you. How much you can borrow depends upon several factors, such as your home’s appraised value, the equity you have in your home, and your ability to repay.
Your credit limit is often calculated as a percentage of the home’s appraised value, less the outstanding balance.
Once you’ve decided that a HELOC is right for you, it’s time to shop lines of credit to ensure you’re getting the best deal in not only the actual HELOC, but also the lender. Examine the HELOC offers to compare rates, fees, upfront charges and points, length of plan and other terms to see what is right for you. You’ll also need to consider expenses like appraisal fees and closing costs. Even more important, examine the lender’s reputation, service, strength and stability to make sure it’s a financial institution with which you truly want to do business.