A home equity line of credit (HELOC) is a revolving line of credit that allows homeowners to borrow money against the equity they have in their property. A HELOC provides borrowers with a predetermined credit limit that they can access as needed within a specified period, known as a draw period. Equity is the difference between the current market value of the home and the outstanding balance on the mortgage or any other liens on the property.
With a HELOC, homeowners can tap into this equity to finance various expenses. Unlike a home equity loan, which provides a lump sum, HELOC offers more flexibility. Borrowers can withdraw funds as needed during the draw period, which typically lasts around 5 to 10 years.
HELOCs often have variable interest rates, meaning the interest rate fluctuates over time based on market conditions. The interest is typically calculated based on a benchmark rate, such as the prime rate, plus a margin determined by the lender.
After the draw period, the HELOC enters the repayment period, which is usually around 10 to 20 years. During this phase, borrowers can no longer withdraw funds and must begin repaying the outstanding balance and interest.