Definition
HELOC (home equity line of credit)
A HELOC, or home equity line of credit, is a revolving credit line secured by the home, usually in second position behind the first mortgage. The borrower draws funds as needed during a draw period, often paying interest only, then repays principal and interest during a repayment period. Rates are commonly variable.
The credit limit is set by combined loan-to-value (CLTV): the lender's maximum CLTV times the home value, minus the first mortgage balance.
Worked example. A home is worth $500,000 with a $300,000 first mortgage. If the lender allows 85% CLTV, total liens can reach $425,000, so the line can be up to $125,000. The borrower draws $50,000 for a renovation. At an illustrative variable rate of 8.5%, the interest-only payment during the draw period is about $354 a month. When the draw period ends, the outstanding balance is amortized over the repayment period, and the payment rises.
HELOCs suit staggered expenses such as projects or tuition, because interest is charged only on what is drawn. They let a homeowner keep a low-rate first mortgage intact. The trade-offs are rate risk, since most HELOCs float with the prime rate, and payment shock when repayment begins. Lenders can freeze or reduce lines if values fall or credit changes. Some lines carry annual fees or early-closure fees.
A home equity loan is the fixed-rate, lump-sum alternative. The HELOC calculator estimates both draw-period and repayment-period payments.
Calculators that use this term
FAQ · 2 questions
Questions about HELOC (home equity line of credit)
How is a HELOC limit calculated?
Lenders multiply your home value by their maximum combined LTV and subtract what you owe on the first mortgage. The result is the most the line can be, subject to income and credit.
What happens when the HELOC draw period ends?
You can no longer borrow, and the balance converts to principal-and-interest payments over the repayment period, which usually raises the monthly payment.
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