What is a Home Equity Line of Credit?
A home equity line of credit aka HELOC is a loan in which the lender agrees to lend a borrower maximum amount, to be repaid within an agreed period or term. The collateral is the borrower's equity in their house.
Think of a HELOC loan as being similar to using a credit card. Here, your lender will decide upon a maximum loan amount and you can take out as much money as you need — until you reach the limit. And, you make monthly repayments to pay back your loan. But the good news is that the interest rate on a HELOC is far lower than it is on a credit card. You can borrow up to 85% of the value of your home minus the amount you own.
Here’s the simple math:
Suppose you have a $600,000 home with $400,000 balance on your first mortgage and your lender gives you access to up to 85% of your home’s equity. Your HELOC limit will come out to be $110,000.
$600,000 x 85% = $510,000
$510,000 – $400,000 = $110,000