Home equity line of credit (HELOC)

A revolving credit line secured by a home, letting the owner borrow against equity as needed up to a set limit.

What it means

A HELOC works like a credit card backed by the house. During a draw period, often around 10 years, the owner can borrow, repay and borrow again, and some lenders allow interest-only payments. Afterward comes a repayment period when no new draws are allowed and payments cover principal and interest.

Most HELOCs have variable rates tied to an index such as the prime rate, so payments can rise. The credit limit depends on a maximum combined loan-to-value ratio the lender sets. Lenders can freeze or reduce a line if the home’s value drops, and missed payments can lead to foreclosure.

Example

Suppose a home is worth $400,000 with $250,000 owed, and the lender allows a combined LTV of 85%. That is $340,000 minus $250,000, so the HELOC limit could be $90,000.

How it’s used

Ongoing renovation projects paid in stages
A backup source of funds for large expenses
Paying off higher-interest debt

Strengths and weaknesses

Strengths

Borrow only what is needed and pay interest only on that amount
Usually lower rates than credit cards or personal loans
Flexible reuse during the draw period

Weaknesses

Variable rate can raise payments
Payment can jump when the repayment period starts
Home is collateral, and the line can be frozen or cut

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.