HELOC Borrowing Basics

A home equity line of credit (HELOC) is a very powerful and flexible financial tool, allowing you to borrow funds using the equity you’ve built in your home.

A HELOC has many uses, but the most common is for home improvement projects, like modernizing a kitchen, renovating a bathroom, adding a deck or patio, replacing old windows with energy-efficient options, finishing a basement, and much more.

But that’s just the tip of the iceberg. HELOCs can also be used to consolidate high-interest credit cards to reduce monthly payments, fund a college education, pay down medical bills, and make large purchases like appliances. If you can dream it, a HELOC can help you achieve it.

This article will walk you through the basics of HELOC borrowing to help you decide whether a home equity line of credit is the right solution for you.

Calculating your equity

Because a HELOC leverages the equity you’ve built in your home, the first step is to calculate how much equity you’ve built over the years. To do this, take your home’s current appraised value and subtract your outstanding mortgage balance. That number is your home equity.

For example, if your home is valued at $400,000 and you have an outstanding mortgage balance of $150,000, that means you’ve built $250,000 worth of equity in your home. A HELOC allows you to borrow a high percentage of that equity— usually 85% or higher.

Our convenient HELOC calculator can help you determine how much equity you’ve built in your home, as well as your estimated monthly HELOC payments.

In most cases, you will need an appraisal for a home equity line of credit. Depending on location, type of property and property characteristics, it can be a full appraisal, or “drive-by” appraisal. During a drive-by appraisal, the property appraiser never enters the home and instead assesses from the outside. Factors like the age of the home and comparable sales in the neighborhood can impact the appraised value.

HELOC Rate Lock-in

HELOC rates are typically lower than other credit lines and personal loans, making a home equity line of credit a good option for many homeowners. Interest rates depend on market factors, borrower’s creditworthiness, and other considerations. As a result, HELOC interest rates are always changing.

You also have the option to lock in your interest rate at any time during the term of the HELOC (as long as the locked period doesn’t extend beyond the maturity date of the HELOC), and lock-in rates* may include all or a portion of your outstanding balance. By locking in your rate, you’re also locking in your monthly payment. That means, if interest rates continue to rise, your monthly payment won’t. You can even lock and unlock your balance at any time. These tools, combined with the flexibility of a HELOC, allows you to essentially pick your payment.

Draw and Repayment

A HELOC is a revolving line of credit. As you make purchases using your available credit, your total balance increases and your available balance decreases. Making payments will decrease your balance, freeing up more credit to use on purchases.

HELOCs are divided into two distinct periods— the draw period and the repayment period. During the draw period, which could last up to 10 years depending on the term of the HELOC, you can access the funds you need and make interest-only payments on the amount. This is where a HELOC is more flexible than a personal loan. Instead of having to take the entire lump sum upfront, a HELOC allows you to use only the funds you need, when you need them. With a HELOC, you’re not paying interest on a loan you’re not using.

The second period is the repayment period. During the repayment period, which can be up to 20 years, depending on the HELOC terms, the monthly payments will include both principal and interest.

There’s no penalty for paying off your HELOC balance early, and it’s possible to make principal payments during the draw period, reducing the balance and freeing up more credit to be used.

And as an added bonus, your interest-only payments during the draw period may be tax-deductible. Consult your tax advisor for more information.

Let’s HELOC it in.

With a near unlimited number of uses, interest-only payments, flexible terms, and convenient access to the funds you need, a HELOC is the go-to choice for many borrowers. Put your home equity to work for you.

Let’s HELOC it in. Apply today.