Definition
A HELOC is revolving credit secured by home equity. You borrow what you need, pay interest only on borrowed amounts, and can draw additional funds as you repay. It's ideal for ongoing projects with uncertain total costs. Two phases: draw period (10 years usually), then repayment period.
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HELOCs function similarly to credit cards but are secured by home equity. Lenders typically allow borrowing up to 85% of home equity (20-25% retained as cushion). HELOCs have two phases: a draw period (usually 10 years) where borrowers can borrow and make interest-only payments, followed by a repayment period (typically 10-20 years) where principal and interest must be paid. Interest rates are usually variable, tied to prime rate. HELOCs are ideal for ongoing or irregular expenses like home renovation projects.
Pro Tip
HELOCs are excellent for ongoing projects because you only pay interest on what you borrow; lock in a fixed rate before refinancing if rates rise.
Example
You have $150,000 in home equity. You open a HELOC with a $100,000 limit at prime + 1%. In year one, you draw $30,000 for a deck; you only pay interest on the $30,000 borrowed, and you can draw more as needed.