A home equity line of credit (HELOC) is a type of secondary financing that consists of a revolving line of credit secured by a lien junior to a mortgage.
See also: what is HELOC.
When you pay your mortgage, you build home equity. In other words, the less money you owe on your mortgage, the more home equity you have. You can use your home equity to borrow money to achieve other financial or personal goals. In fact, borrowing against your home equity is often one of the least expensive and easiest ways to finance major purchases.
There are two ways to borrow against your home equity: home equity loans or Home Equity Lines of Credit – HELOCs. HELOCs are similar to credit cards because they are revolving lines of credit. If you get a HELOC you will most likely have a variable interest rate and a credit limit set by the lender. You can then write checks up to the amount that the lender has set for you. Borrowing money through a HELOC means that the amount you can borrow is reduced until you pay it back. When you repay money, you can begin to borrow it again.
Though borrowing money through a HELOC can be one of the easiest and most economical ways finance a major purchase, that does not mean that you should use a HELOC to cover day-to-day expenses. Some experts recommend using a HELOC to make home repairs or improvements, for college expenses or for consolidation of high-interest debt. Remember, home improvement and renovations can increase your home’s value, and subsequently, your home equity, so using a HELOC can be a smart financing move. Also keep in mind that if you fail to make payments and default on your HELOC, your home is at stake.
You may be given different options for repaying your HELOC. Like a student loan or a personal loan, the longer it takes you to repay the amount you borrow, the more it ends up costing due to interest rates, so make a plan and stick to it.