What is a HELOC?

A HELOC, or a home equity line of credit, is a second mortgage that functions similarly to a credit card in that it provides access to funds at any point during a timeframe known as a draw period. In other words, homeowners who take out a HELOC can choose if, when, and how much they borrow on the loan. Generally, this type of loan works best for homeowners interested in having access to extra funds in case the need arises suddenly.

These loans typically come with variable interest rates, and you will not be charged this rate for any funds you do not end up borrowing. Most HELOC loans come with low if any closing costs, which can be a major financial benefit.

HELOC Repayment

HELOC loans include two phases: the draw period and the repayment period. As the names imply, the draw period is the period in which you are welcome to borrow from your loan as you wish. The repayment period is when you’ll need to start repaying your loan.

Most draw periods are ten years long, and homeowners are typically only expected to make small payments on interest during this time. Repayment periods typically last for 20 years but can be as short as 15 or as long as 30. The longer the period, the lower your monthly payments will be, but know that you will not be able to borrow additional funds during this time so you’ll need to ensure ahead of time that you will be able to afford your payments. Keep in mind that your home is your collateral -- if for any reason you are unable to pay your loan back, you may be subject to losing it.

Will a HELOC work for you?

There are many situations in which a HELOC is a fantastic option for homeowners interested in utilizing their home equity, but there are also cases where a different type of loan may work out better. Here’s a quick look at some of the pros and cons of a home equity line of credit:

In general, a HELOC is an excellent choice if you’re looking for a borrowing option that you can use if the need arises at some point during the drawing period. So long as you can mitigate borrowing and only use this option when necessary, this can be a fantastic emergency fund option. However, if you have a specific borrowing goal and a lump sum may work better for your needs, you might want to look into a fixed home equity loan. Likewise, if you want a loan that has lower interest rates and is easier to qualify for, consider a cash-out refinance.

No matter which type of loan you opt for, using your home equity can be a fantastic way to get the full value out of being a homeowner. To ensure you get the best rates and loan terms, be sure to shop around and check out our curated comparisons of the top lenders in the industry as well as our other helpful resources before you get started.