Feb 9, 2021

What’s a Home Equity Line of Credit?

Hand types on calculator
Maybe you’re thinking of remodeling your kitchen, putting in a new pool for those hot Arizona summers or looking to finish up some repair work, whatever big project it may be, you can probably assume the costs will be high. If you don’t have the funds readily accessible, you might want to consider a home equity line of credit to help make any pricey action items possible. 

What’s a Home Equity Line of Credit (HELOC)?

A home equity line of credit, also known as a HELOC, is a revolving line of credit that’s secured by the equity in your home. Borrowers often go this route because HELOCs usually offer a lower interest rate than other types of loans. 

How does it work?

The equity in your home allows you to borrow a certain amount set by the lender and just like a credit card, as you pay back your balance along with interest, you have the option to borrow that amount again. 

If you’re approved, you’ll have what’s known as a “draw period” which is a fixed amount of time in which you’re allowed to withdraw funds. Once the draw period is over, you’ll need to repay the balance owed. Depending on your situation, you may need to pay a large lump sum and/or fees once the draw period is over and you’ll have what’s called a repayment period where you can make payments over a specified time (usually up to 20 years). 

Interest rates on HELOCs are typically variable which means your rate can change on a monthly basis. Your interest rate is based on an index, which is used as a financial standard sourced from the Wall Street Journal Prime Rate and a margin which is determined by your credit score. If the index rate fluctuates, so does the HELOC interest rate.  

Remember to review your financial situation and goals. Take a look at your budget and assess whether you can make the monthly payments and how you’ll be using those funds. HELOCs are typically used for home renovations or to make major repairs, which can add value to your home. If you’re thinking of making improvements to your home, the interest on your HELOC may also be tax-deductible but be sure to consult with your tax advisor to be aware of any changes in tax rules.