What is a Home Equity Line of Credit (HELOC) Loan?

A Home Equity Line of Credit (HELOC) loan lets you use the equity in your home as cash for purchases. Equity is the market value of your home, minus whatever you owe on the house. With a HELOC loan, your house is held as collateral, making on-time payments critical since defaulting on your loan puts your house at risk for foreclosure.

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Why choose a HELOC Loan?

These loans work a lot like a credit card. You borrow money as you need it, and pay back the interest on what you borrow. Other loans require that you take out one lump sum at the start, so HELOC loans are handy when you would rather take out bits and pieces over time. Imagine you’re working on a few big renovations in your home. Rather than managing one huge sum throughout a couple of years, with a HELOC loan, you can take out money each time you start a project, making it easier to manage.

Payment Periods

HELOC loans have two payment periods: the Draw period and the Repayment period.

The Draw period is when you can borrow money, and they’re typically between 5 to 10 years. Once your Draw period is over you can no longer take out money and the Repayment period starts. The Repayment period is exactly what it sounds like. You’ll pay back your loan, plus interest, over 20 years (the typical period). 

Qualifying for a HELOC Loan

There are a few things you need to get started with a HELOC loan.

• • Minimum equity: You usually need to have at least 15 – 20% equity in your home to qualify for a HELOC loan. You’ll also need an appraisal to determine how much your house is worth.
  • Great Credit: Usually 680 or above is required
  • Low Debt to Income Ratio: The money you bring in compared to how much you owe. The lower your debt, the better. This includes debts like loans and credit cards.
  • Steady Income: A higher income and a steady paycheck can help you secure a better loan. Having money coming in consistently shows you can pay back debts.

HELOC loans come with lots of different repayment options, terms, and fees, so make sure you understand exactly what you’re getting into before starting one. 

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