What Is a HELOC and How Does It Work?

dchapman70
Jun 3
2 min read

Updated: Jul 3

What is a HELOC?

A Home Equity Line of Credit (HELOC) is a flexible way to borrow money using the equity in your home. If you’ve built up value in your property — the difference between what your home is worth and what you still owe on your mortgage — a HELOC lets you tap into that equity when you need it.

How does a HELOC work?

A HELOC functions like a credit card. You’re approved for a line of credit based on your home equity (possibly up to 90% of your home’s value, minus your first mortgage balance). You can borrow, repay, and borrow again during the draw period, which lasts 3 years on our HELOC program. Your payments during the draw period are based on the current balance.

After that, the repayment period begins, usually lasting 12 to 27 years, depending on your loan term. During the repayment period, you can no longer borrow and must pay back both principal and interest.

Example

Say your home is worth $400,000 and you owe $250,000 — you have $150,000 in equity. A lender might approve you for a $110,000 HELOC. You borrow $25,000 for renovations, paying interest only on that amount until you repay or borrow more.

HELOC Key Features

Interest Rates: Most HELOCs have rates tied to the prime rate, which means your payments can change over time. Local Mortgage offers both fixed and variable rate HELOCs depending on your state.
Flexible Access: Borrow only what you need — and only pay interest on that amount.
Potential Tax Benefits: Interest may be deductible if used for qualified home improvements (check with a tax advisor).

Pros and cons of a HELOC

Pros:

Lower interest than credit cards or personal loans
Reusable credit line
Interest-only payments during the draw period

Cons:

Payments can increase with interest rates
Your home is collateral — failure to repay could lead to foreclosure
May include fees (e.g., annual or closing costs)

Considering getting a HELOC?

It can be a powerful financial tool — just be sure you understand the terms and risks. If you’re curious how much you could borrow, consider speaking with a lender.

How I Can Help You

When it comes time to purchase a home or refinance an existing loan, I want to help you! Hopefully articles like this give you good information and a better understanding of the mortgage world but let me use my experience and expertise to help you with your particular situation.

I tell my clients and referral partners that a mortgage transaction starts with a simple conversation. Let’s talk about your financial situation, budget, and goals so that I can help you determine the best solution for you. During a 10-minute informal conversation, we can get you on the right path as it relates to a home purchase or mortgage refinance.