On this page
What's next
Earn a high-yield savings rate with JG Wentworth Debt Relief
What is a Home Equity Line of Credit?
by
JG Wentworth
•
February 24, 2025
•
4 min
A home equity line of credit, commonly referred to as a HELOC, is a versatile financial tool that allows homeowners to borrow against the equity they have built up in their home. Unlike a traditional home equity loan that gives you a lump sum upfront, a HELOC operates more like a credit card, providing a revolving line of credit that you can draw from as needed.*
Understanding Home Equity
To grasp the concept of a HELOC, it’s essential first to understand home equity. Equity is the difference between the current market value of your property and the amount you owe on any mortgages. For instance, if your home is valued at $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.
How Does a HELOC Work?
A HELOC is divided into two phases: the draw period and the repayment period.
- Draw Period: During this phase, you can borrow as much as you need up to your credit limit. You can access the funds using special checks or a card linked to the account. During the draw period, which typically lasts about 10 years, borrowers are usually required to make payments only on the interest.
- Repayment Period: Once the draw period ends, the repayment period begins. You can no longer draw on the line of credit, and you must start paying back both the principal and the interest. This period can last from 10 to 20 years, depending on the terms of the HELOC.
Interest Rates and Fees
The interest rates on HELOCs are generally variable, meaning they can change over time based on the prevailing rates in the market. These rates are usually pegged to an index, such as the prime rate, with a margin added by the lender. It’s important to note that because these rates can fluctuate, your payments can vary as well.
In addition to interest rates, HELOCs may come with various fees, including application fees, appraisal fees, attorney fees, and annual fees. It’s crucial to understand all the costs involved before deciding to proceed with a HELOC.
Benefits of a HELOC
One of the primary advantages of a HELOC is its flexibility. You can borrow exactly the amount you need, when you need it, without having to take out a large loan up front. This makes it an excellent option for projects that require funding over time, such as home renovations or funding education.
Another benefit is the potential tax advantages. The interest you pay on a HELOC may be tax-deductible if you use the funds to buy, build, or substantially improve your home. However, due to changes in tax laws under the Tax Cuts and Jobs Act, it’s wise to consult with a tax advisor to understand the current benefits.
Compare Home Equity Options
Compare Home Equity Options
Risks of a HELOC
Despite its benefits, there are risks associated with HELOCs. Since a HELOC is secured by your home, failing to make payments can put your home at risk of foreclosure. Additionally, the variable interest rate means your monthly payments may increase if interest rates rise.
Borrowers must also manage their spending discipline. Having easy access to a line of credit can lead to overspending, potentially putting financial strain on your budget.
Is a HELOC Right for You?
Deciding whether a HELOC is the right choice depends on your financial situation, your creditworthiness, and your spending habits. It’s suited for those who need ongoing access to funds and are comfortable with the risk associated with a variable interest rate. It’s also ideal for borrowers who are disciplined in their spending and can manage fluctuating payment amounts.
Conclusion
A home equity line of credit is a powerful financial tool when used wisely. It offers flexibility and potential tax benefits but comes with risks like variable interest rates and the possibility of foreclosure. Before deciding on a HELOC, it’s crucial to carefully assess your financial needs, understand all terms and conditions, and consider your ability to manage the line of credit responsibly. With the right approach, a HELOC can be a valuable resource for achieving your financial goals.
About the author
Recommended reading for you
*Any information provided on this site is for educational purposes only. JGW Connects, LLC is not an agent of you or any third party advertiser on this website. You should rely on your own judgement in deciding which available product, terms and provider that best suits your personal financial requirements. We do not offer financial advice, advisory or brokerage services. We recommend that you consult with our own independent advisors regarding these products and services
JGW Connects, LLC is an independent, advertising-supported comparison site and marketing lead generator and does not play a role in decisioning for any of the third party products advertised on this webpage. JGW Connects, LLC and the JG Wentworth Company family of companies are not affiliated with the companies advertising on this webpage. You are not charged for our services. JGW Connects, LLC may receive a referral fee or other affiliate fee for connecting you with these third-party companies or upon you contracting with a third-party company. We do not make any guarantees that these are the only providers in the marketplace, or that their products or services will meet your needs. The products and services presented to you may or may not be the best, or only options, available.
JGW Connects does not provide any of the products or services advertised and does not make any decisions regarding your eligibility for those products or services. All decisions regarding approval or denial of a particular product or service are the responsibility of the participating company and will vary based upon your particular financial situation, and criteria determined by the company to whom you are matched. Not all consumers will qualify for the advertised rates and terms.