HELOC (Home Equity Line of Credit)
A revolving line of credit secured by the equity in a homeowner's property.
What is HELOC?
A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by the borrower's home equity — the difference between the home's market value and the outstanding mortgage balance. Like a credit card, a HELOC allows borrowers to draw funds up to a credit limit, repay, and redraw during the draw period (typically 5–10 years), paying interest only on the amount outstanding. After the draw period, the balance converts to a repayment phase (typically 10–20 years) with principal and interest payments. HELOCs typically carry variable interest rates tied to the prime rate. They are commonly used for home improvements, debt consolidation, education expenses, and other large costs. Because the home is collateral, failure to repay can result in foreclosure.
Example
A homeowner with a $600,000 house and $350,000 remaining mortgage has $250,000 in home equity. A lender offers a HELOC with an 80% combined loan-to-value limit — meaning total debt can be up to $480,000 (80% × $600,000). With $350,000 already owed, the HELOC credit limit is $130,000. The homeowner can draw funds as needed for home renovations, paying interest only at prime + 0.5% on the amount used.
Source: Consumer Financial Protection Bureau — Home Equity Lines of Credit