Home equity line of credit
HELOCUpdated
What is home equity line of credit?
A HELOC is a revolving credit line secured by your home. It sits behind your existing mortgage as a second lien, and its rate is usually variable.
Home equity line of credit questions
- What does HELOC stand for?
- Home equity line of credit. It is a revolving credit line secured by your home, sitting behind your existing mortgage as a second lien.
- What is a HELOC in simple terms?
- A credit card secured by your house, with a much lower rate and a much larger limit. You draw what you need, repay it, and can draw again during the draw period.
- How does a HELOC work?
- In two phases. During the draw period, commonly ten years, you can borrow and repay repeatedly, and many lenders ask only for interest. When the repayment period begins the balance amortizes and the payment steps up, often sharply.
- Is a HELOC a second mortgage?
- Yes. It is a second lien on the same property, which is what leaves your first mortgage and its rate untouched.
What it means in practice
A HELOC has two phases. During the draw period, commonly ten years, you can borrow and repay repeatedly, and many lenders require only interest payments. During the repayment period that follows, the balance amortizes and the payment steps up, often sharply.
Because the HELOC is a second lien, your first mortgage and its rate are untouched, which is its main advantage over a cash-out refinance when your existing rate is low.
The trade-off is rate risk. HELOC rates typically float with the prime rate, so both the payment and the total interest are unknown in advance. Any calculator, this one included, can only model a rate held constant.