If you own a home, you’ve probably heard of a home equity line of credit before. However, these products can often be the something of a mystery, especially to those newer to homeownership. With that in mind, I’ve decided to put an end to the confusion once and for all. Below is your guide to home equity loans. It will cover what a home equity line of credit is, how it works, and how to qualify for one of your own.
What is a home equity line of credit?
A home equity line of credit, commonly abbreviated as a HELOC, is essentially a second mortgage that functions similarly to a credit card. It’s a line of credit that allows you to borrow against the equity in your home, as needed. Typically, this type of credit is used to cover big expenses such as medical debt, home renovations, or financing a child’s education.
Since HELOCs are secured by your home, meaning that the lender can foreclose on you if you decide not to pay back the loan, they often come with better interest rates than most traditional credit cards. However, their interest rates are adjustable, so you’ll want to be sure to pay close attention to how much interest you could be paying over the life of the loan.
How does it work?
HELOCs handle repayment a little differently than traditional credit cards. Instead of paying off as much of the balance as possible each month, this type of credit comes with two separate payment periods, each with their own set of rules.
The first period is known as the “draw period.” During this time, you’re allowed to draw on the line of credit whenever you want. You also will likely only…