Understanding a Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, or HELOC, is a flexible financial tool that allows homeowners to borrow money by leveraging the equity they have built in their homes. It functions similarly to a credit card but typically offers lower interest rates because it is secured by your property.

How a HELOC Works

A HELOC is a revolving line of credit with two distinct phases. The amount you can borrow is determined by your home's value and the amount you still owe on your primary mortgage.

The visual below provides a clear step-by-step overview of the HELOC process, from tapping into your home's equity to the final repayment phase.

  • Draw Period: This initial phase typically lasts for 5 to 10 years. During this time, you can borrow from your credit line as needed, up to your approved limit, using special checks or a card. You are usually only required to make payments on the interest on the amount you have borrowed, though you can choose to pay down the principal as well.

  • Repayment Period: Once the draw period ends, the repayment period begins, which usually lasts for 10 to 20 years. You can no longer borrow funds, and your monthly payments will increase to include both the principal and interest to pay off the outstanding balance by the end of the term.

Common Uses for a HELOC

Because of their flexibility and typically lower interest rates, HELOCs are often used for substantial expenses, such as:

  • Home Improvements: Funding renovations that can increase your home's value.

  • Debt Consolidation: Paying off higher-interest debt, like credit cards, to simplify payments and potentially save on interest.

  • Major Expenses: Covering costs for education, medical bills, or other significant financial needs.

  • Emergency Fund: Serving as a safety net for unexpected financial challenges.

Benefits and Risks to Consider

Like any financial product, a HELOC comes with its own set of advantages and disadvantages.

Benefits:

  • Lower Interest Rates: HELOCs generally have lower interest rates compared to unsecured loans like credit cards or personal loans.

  • Flexibility: You borrow only what you need, when you need it, rather than taking a lump sum.

  • Potential Tax Deductions: The interest paid on a HELOC may be tax-deductible if the funds are used to buy, build, or substantially improve your home. Note: Tax laws change, so always consult a tax advisor.

Risks:

  • Variable Interest Rates: Most HELOCs have variable rates that can fluctuate with market conditions, potentially increasing your monthly payments.

  • Your Home is Collateral: Because the loan is secured by your home, failure to make payments could lead to foreclosure.

  • Reduced Equity: Borrowing against your home reduces the amount of equity you have built up, which could affect your ability to sell or refinance in the future.

A HELOC can be a powerful financial tool for responsible homeowners. It is important to carefully consider your financial situation and plans before deciding if a HELOC is the right option for you.

Price & Advice

According to Zillow, 81% of homeowners between 18 and 34 years old have at least one regret about buying their home.

Choosing a mortgage based solely on interest rate, without factoring in your broader financial plan, can limit your long-term wealth.

You deserve to own your home and build wealth. We’ll help you do both.

Kurt Kessler

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This is not a commitment to lend. All loans are subject to credit approval. This information is not intended to be an indication of loan qualification, loan approval or commitment to lend. Other limitations may apply. No Tax Return loans products require other forms of income documentation and asset verification in lieu of tax returns. Not all applicants will qualify. Some products we offer may have a higher interest rate, more points or more fees than other products requiring more extensive or different documentation. Minimum FICO, reserve, and other requirements apply.

Kurt Raymond Kessler NMLS #365130 | Barrett Financial Group, L.L.C. NMLS #181106 | 2701 East Insight Way, Suite 150, Chandler, AZ 85286 | CA 60DBO-46052 & 41DBO-148702

Licensed by Dept. of Financial Protection & Innovation under the California Residential Mortgage Lending Act. Loans made or arranged pursuant to a California Financing Law License