Home Equity line of Credit: What Is It and How Does It Work?

Benefit of a Home Equity Line of Credit: Flexibility 

What is a Home Equity Line of Credit (HELOC)? A home equity line of credit, or HELOC, is based off the value of your home and is a second mortgage that gives you access to cash to help you pay for things such as home improvement projects, unexpected expenses, or that dream vacation, just to name a few. You can draw from a home equity line of credit and repay all or some of it monthly. It works similar to a credit card but is secured by a mortgage on your home.

How do you know how much equity you have to borrow against? Take your home’s value minus the amount you owe on any current mortgages on your home. 

How does a Home Equity Line of Credit work? A Home Equity Line of Credit allows you the flexibility to borrow against your home’s equity, pay it back, and repeat. Most HELOCs have a variable interest rate. This means that as the baseline interest rates go up or down, the interest rate on your HELOC will go up or down, too. Your banker will set your starting interest rate by using an interest rate index, then add a markup depending on your credit score and loan-to-value ratio. Generally the higher your credit score, the lower the markup. The markup can also be referred to as the margin. Before signing off on the HELOC, you should review all the documents and the margin with your banker to make sure you fully understand the terms.

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