What is a home equity line of credit?

A home equity line of credit (HELOC) is a secured form of revolving credit. As a homeowner, it allows you to borrow against the equity of your home. Home equity is the difference between the value of your home and the amount you owe on it. For example, if your home is worth $500,000 and you owe $250,000 on your mortgage, you would have $250,000 in home equity.

A HELOC functions similarly to a credit card. When you need money, you can borrow from your HELOC up to a predefined credit limit. How much you can borrow depends on the equity accumulated for your home. As long as you have credit available, you can continue to borrow and pay interest only on the amount you use.

Typically, HELOCs have a variable rate based on the lender's prime interest rate. Rates are often lower than other types of credit, such as an unsecured loan or credit cards. When determining your rate, lenders usually consider factors including your credit score, net worth and the value of your home.

One of the benefits of a HELOC is that there's plenty of flexibility in how you can use it. While you could technically use a HELOC to fund a vacation or a big wedding, it doesn't mean you should. HELOCs are better suited to pay for significant home improvement projects, such as installing a new roof or renovating a kitchen. You can also use a HELOC to cover emergency expenses, like unexpected car repairs or a broken furnace. Some homeowners use a HELOC to pay off high-interest debt.

While a HELOC can offer a convenient way to access credit, it comes with some risks. If you aren't disciplined in paying off your HELOC, you could accumulate and carry a large amount of debt. If you miss payments on your HELOC, you risk damaging your credit score and making future borrowing more difficult and costly. Failure to repay your HELOC could also result in foreclosure on your home.

HELOCs can be a flexible way to borrow against the value you've built in your home, but make sure you understand the advantages and disadvantages before you decide to use one. Speak with an advisor to learn more about HELOCs.