Home Equity Line of Credit (HELOC)
IntermediateAlso known as: HELOC A home equity line of credit (HELOC) is a revolving credit line, common in the United States, secured on a borrower's home, which allows them to borrow, repay and borrow again up to a set limit based on the equity in the property. A HELOC works more like a credit card than a traditional loan. Instead of receiving a lump sum, the homeowner is given a credit limit and can draw money as needed, paying interest only on the amount actually borrowed. HELOCs usually have two phases. During the draw period, often around ten years, the borrower can take out money and may only have to pay interest. During the repayment period that follows, they can no longer borrow and must repay both principal and interest, which can significantly increase monthly payments. For example, a homeowner might open a HELOC with a limit of 50,000 and draw 15,000 to pay for a kitchen renovation, paying interest only on that 15,000. HELOC interest rates are usually variable, so payments can rise if interest rates increase. As with home equity loans, the home serves as collateral, so failure to repay could lead to foreclosure. Products like HELOCs are less common outside North America. In the United Kingdom, flexible borrowing against a home is more often arranged through offset or flexible mortgages, or by remortgaging.
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