HELOC

A Home Equity Line of Credit (HELOC) works similarly to a credit card, but uses your home as collateral. You are approved for a maximum credit limit based on your home equity, and you can draw from that line as needed during the draw period, which typically lasts 5-10 years. During the draw period, you usually only pay interest on the amount you have borrowed, not the full credit limit.

After the draw period ends, the HELOC enters the repayment period (typically 10-20 years), during which you can no longer borrow against the line and must repay the outstanding balance with both principal and interest payments. Most HELOCs have variable interest rates that are tied to the prime rate, meaning your payments can fluctuate as interest rates change. Some lenders offer fixed-rate conversion options that let you lock in a rate on a portion of your balance.

HELOCs are popular for home improvements, debt consolidation, education expenses, and emergency funds because of their flexibility. You only pay interest on what you use, and the interest may be tax-deductible if the funds are used for home improvements. Most lenders allow you to borrow up to 80-90% of your combined loan-to-value (CLTV) ratio, meaning the total of your mortgage balance plus HELOC cannot exceed 80-90% of your home's appraised value.