The acronym HELOC stands for “Home Equity Line of Credit.” What this means is a line of credit is extended to the homeowner that uses the borrower’s home as collateral. Ready to dig a little deeper?

 

HELOCs are simply a “home equity line.” When you get a traditional mortgage loan, a lender pays out the borrowed amount in its entirety at closing. From there, the borrower adheres to the terms of the loan in paying back the full amount plus interest. However, with a HELOC, a lender promises a borrower a certain amount of funds that the borrower then draws from for the amount and at the time they desire.

 

The terms of a HELOC are very different from a traditional mortgage loan. The loan generally begins with a “draw” period where the borrower is allowed to draw funds when needed. This period is followed by the repayment period where the borrower must pay back the amount they drew from the HELOC account. In some cases, lenders require the drawn amount to be paid back in one lump sum. In this instance, borrowers must refinance the loan.

 

One of the benefits of a HELOC is having funds available for big expenses such as college tuition, credit card payments, or an emergency fund. They also accrue lower upfront costs in most cases.

 

However, a HELOC is also much riskier than a traditional mortgage loan since interested is calculated daily rather than monthly and is based on daily changes to the account due to withdrawals and repayments. All HELOCs are established with an adjustable rate mortgage (ARM) but depending on the market’s fluctuations, the difference in rates could be suddenly drastic.