What does "Home equity line of credit (HELOC)" mean?

Definition

A HELOC, or home equity line of credit, allows you to borrow against your home's equity as needed. It works like a credit card, giving you a line of credit you can draw from during a set period, and it uses your home as collateral.

Understanding HELOC in Mortgages

A HELOC often comes into play after you've built some equity in your home. It's like having a credit card, but your home is the collateral. You can borrow up to a certain limit, repay, and borrow again during the draw period. Example: If you have $50,000 in equity, a lender might approve a $30,000 HELOC. You only pay interest on what you use. It's not a one-time loan amount that you receive all at once; it's a flexible line of credit that you tap into as needed. Remember, it's not the same as refinancing your mortgage.

People Want To Know

How do I determine if I have enough equity in my home to qualify for a HELOC?

To determine if you have enough equity for a HELOC, calculate your home's current market value and subtract any outstanding mortgage balances. Lenders have different equity requirements. Contact lenders to understand their specific criteria and find out if you qualify based on your home's equity.

What costs should I expect when taking out a HELOC, and are there any ongoing fees?

Expect to pay closing costs when taking out a HELOC, which can include appraisal fees (around $300 to $500), application fees (typically $50 to $100), and title search fees (up to $500). Ongoing fees may include an annual fee (ranging from $50 to $100) or a maintenance fee, depending on the lender. Interest rates vary and are typically variable, based on the prime rate plus a margin.

How does the process of applying for a HELOC compare to getting a traditional mortgage?

Applying for a HELOC is generally simpler and faster than securing a traditional mortgage. The process often requires less documentation and a lower credit score, typically around 620. Approval times for HELOCs can be as quick as a few days, while traditional mortgages usually take 30 to 45 days. Additionally, HELOCs often involve lower closing costs.

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More From The Mortgage Glossary

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