HELOC (Home Equity Line of Credit)

A HELOC works like a credit card secured by your home. You're approved for a maximum credit limit based on your home equity, and you can draw funds as needed during a "draw period" (typically 10 years), then repay during a "repayment period" (typically 10-20 years).

How Much Can You Borrow: Most lenders allow you to borrow up to 85% of your home's value minus what you owe on your mortgage.

Example:

• Home value: $400,000
• Mortgage balance: $250,000
• Maximum HELOC: ($400,000 × 85%) - $250,000 = $90,000

Draw Period (Years 1-10):

• Borrow up to your limit whenever needed
• Usually pay interest-only payments
• Variable interest rate (typically prime rate + margin)
• Can re-borrow paid amounts (revolving credit)

Repayment Period (Years 11-30):

• Can't borrow anymore
• Pay principal + interest
• Monthly payments increase significantly

Common Uses: ✅ Home renovations (increases home value) ✅ Debt consolidation (lower interest than credit cards) ✅ Emergency fund backup ✅ Investment opportunities

Advantages:

• Only pay interest on what you use
• Lower rates than credit cards or personal loans
• Tax-deductible if used for home improvements
• Flexible access to funds

Risks: ⚠️ Your home is collateral

• Default = foreclosure ⚠️ Variable rates
• Payments can increase if rates rise ⚠️ Payment shock
• Repayment period payments much higher ⚠️ Overspending temptation
• Easy access to large amounts

HELOC vs Home Equity Loan:

• HELOC: Revolving credit, variable rate, draw as needed
• Home Equity Loan: Lump sum, fixed rate, fixed payments

When to Use a HELOC:

• You need flexible access over time (renovation project phases)
• You have irregular expenses to cover
• You want lower initial payments

When to Avoid:

• You can't afford if rates increase 2-3%
• You lack discipline with credit
• You're close to retirement (risky to carry into retirement)