Tapping Into Your Home's Value
As you pay down your mortgage and your property value increases, you build equity. A Home Equity Line of Credit (HELOC) allows you to borrow against that built-up value.
How a HELOC Works
A HELOC acts much like a high-limit credit card secured by your house. Instead of receiving a lump sum, you get a line of credit that you can draw from over a specific 'draw period' (often 10 years). During this time, you usually only have to pay interest on the money you actually use.
HELOC vs. Home Equity Loan
While a HELOC is a revolving line of credit with variable interest rates, a Home Equity Loan provides a single lump-sum payout with a fixed interest rate and fixed monthly payments. HELOCs offer flexibility; Loans offer predictability.
Best Uses for a HELOC
Financial experts recommend using HELOCs for investments that yield a return, such as significant home improvements that increase property value. Using a HELOC for vacations, cars, or living expenses is highly risky because if you fail to repay, the lender can foreclose on your home.