Home Equity Line of Credit
Definition and meaning of Home Equity Line of Credit in real estate.
A home equity line of credit is a revolving source of funds secured by the equity in a homeowner's property, allowing the owner to borrow, repay, and borrow again up to a approved limit. It works similarly to a credit card, where the borrower only pays interest on the amount actually used.
In more detail
These lines of credit typically feature a draw period, often lasting ten years, during which the borrower can access funds and make interest-only payments. Once the draw period ends, the loan enters the repayment period, which often lasts fifteen to twenty years, during which the borrower must pay back both principal and interest.
The interest rate is usually variable, meaning monthly payments can fluctuate based on broader market interest rate changes. Lenders generally limit the total borrowing amount to 80 or 85 percent of the home's appraised value, minus any outstanding first mortgage.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Interest rate | Typically variable |
| Borrowing limit | Usually up to 85% of home value |
| Also known as | HELOC |
A homeowner secures a home equity line of credit to finance a renovation project, drawing funds as needed and only paying interest on the borrowed amount.
Frequently asked questions
How does a HELOC differ from a home equity loan?
A HELOC is a revolving line of credit with variable rates and flexible borrowing, while a home equity loan provides a lump sum with a fixed interest rate and set monthly payments.
Can a lender freeze my HELOC?
Yes, if your home's value drops significantly or your financial situation deteriorates, the lender has the right to freeze or reduce your credit limit.