# How Does A Home Equity Line Of Credit (HELOC) Work?

A home equity line of credit (HELOC) is a type of mortgage loan that acts similar to a credit card, except the line of available credit is tied to your home's equity.


A** home equity line of credit** (HELOC) is a type of mortgage loan that acts similar to a credit card, except the line of available credit is tied to your home's equity. So instead of using funds advanced to you by a creditor, you use the cash from the value of your home.

## HELOC Benefits

- Lower Interest Rates HELOC interest rates tend to be lower than personal loans or credit cards.
- You Only Pay For What You Use - You're charged interest only if you withdraw funds.
- No Closing Costs - HELOCs often have low or no closing costs, making them an attractive alternative for small loan amounts.

## Applying For a HELOC

Similar to applying for a mortgage, there will be a credit review and a home appraisal. However, some lenders may only need to review the data regarding your property's valuation and real estate market in the area, not a full appraisal.

You'll also need at least 20% equity in your home and a credit score of 620 or higher. Your debt-to-income ratio should be in the low 40s or less, with your credit history in good shape.

## HELOC Draw Period

With a HELOC, you can borrow up to 80 percent of your home's equity for the life of the loan, which lasts about 5-10 years. You can use as much or as little as you want and pay interest only on what you use, not the whole amount you were approved for.

## HELOC Repayment Period

HELOCs repayment period usually lasts about 10 – 20 years, where you'll make regular monthly payments on the principal and interest until it's paid off. Remember that these payments are in addition to your regular mortgage payments.

## HELOC Vs. Home Equity Loan Vs. Refinance

### Home Equity Loan

While a HELOC is considered a type of home equity loan, a home equity loan typically refers to borrowing a lump sum against your home. Remember that with a HELOC, you only borrow what you need and do so over an extended period.

### Cash-Out Refi

With a cash-out refinance, you replace your current mortgage with a new one. You'll have at least 20% of your equity in a lump sum along with new mortgage terms. Since a cash-out refi is a new loan, it also comes with closing costs (remember that HELOCs have no closing costs). However, you'll only have a single payment to make to your lender versus a mortgage payment and HELOC payment with a home equity line of credit.

## Is A HELOC Right For You?

Since every borrower has different needs, we offer various options for gaining access to your home equity. Whether it's a flexibility of a HELOC you're after or lowering your rate with cash out, we can match you with the best refi program. Contact us today for an obligation-free conversation.