Understanding Home Equity Line of Credit (HELOC)

What is a HELOC?

A Home Equity Line of Credit, also known as a HELOC, is a line of credit secured by your home. It provides a revolving credit line that you can use for large expenses or to consolidate higher-interest rate debt on other loans such as credit cards.

How Does a HELOC Work?

With a HELOC, you’re borrowing against the available equity in your home, and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished, much like a credit card. This means you can borrow against it again if you need to, and you can borrow as little or as much as you need throughout your draw period (typically 10 years) up to the credit limit you establish at closing. At the end of the draw period, the repayment period (typically 20 years) begins.

Qualifying for a HELOC

To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe. Also, a lender generally looks at your credit score and history, employment history, monthly income, and monthly debts, just as when you first got your mortgage.

Interest Rates on a HELOC

HELOCs can have either variable or fixed interest rates. When you have a variable interest rate on your home equity line of credit, the rate can change from month to month. The variable rate is calculated from both an index and a margin. An index is a financial indicator used by banks to set rates on many consumer loan products. The margin is constant throughout the life of the line of credit1. Some lenders, including Bank of America, offer an option that allows you to convert a portion of the outstanding variable-rate balance on your HELOC to a fixed rate.

A HELOC can be a valuable financial tool, but it’s important to understand how it works before you apply. Always consult with a financial advisor or tax professional to ensure that a HELOC is the right choice for your financial situation.