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What is a home equity line of credit (HELOC)?

Here’s what you need to know about taking out a HELOC

One of the most valuable benefits of homeownership is the ability to borrow against the equity you build up in your home over time. Many people turn to borrowing options, such as taking out a home equity line of credit (HELOC) to help cover large expenses like home improvements or education costs. Read on to learn how HELOCs work and what to know before making a decision.

What is a HELOC?

A home equity line of credit, or HELOC, is a revolving line of credit available to you based on the equity you have in your home. HELOCs may have lower interest rates than other loans, and the interest you pay may be tax-deductible when used to substantially improve your home.

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HELOCs at a glance

Pros

  • With good credit, you could qualify for a low-interest loan.
  • May offer flexible repayment options.
  • You can draw money as needed.

Cons

  • You’re using your home as collateral.
  • With a variable interest rate, your payments can go up.
  • If housing prices drop, you could owe more than your home is worth.

When do I have to pay back a HELOC?

When using your HELOC, you’ll receive a monthly bill for your minimum payment. Some lenders only require interest payments during the borrowing period. Others have you pay principal and interest, which may help keep your payments more consistent over time. The amount due may change based on your balance and interest rate fluctuations. Making extra principal payments helps you pay less interest and reduces your overall debt more quickly. Like a credit card, as you repay your outstanding balance, the amount of available credit is replenished. At the end of your borrowing period is the repayment period. During this time (usually around 20 years), you can no longer take out money and you must pay off what you owe.

How do you qualify for a HELOC?

To qualify for a HELOC, you need to have enough equity in your home. Typically, you can borrow up to 85 percent of your home’s appraised value minus what you still owe on your mortgage or other loans secured by your home. Your lender will look at your credit score and history, employment history, monthly income and monthly debts. A better credit score improves your chances of qualifying and could lower the interest rates you’ll receive.

Quick tip:

Ask your lender what fees might come with your HELOC, such as an application fee, an annual fee, closing costs and a cancellation or early closure fee.

What’s a fixed-interest-rate option?

Some lenders allow borrowers to convert some of the outstanding variable-rate balance on a HELOC to a fixed rate. Payments are predictable, and this option can protect you from rising interest rates. Fixed interest rates on a HELOC are typically higher than variable HELOC rates.

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The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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Credit and collateral are subject to approval. Terms and conditions apply. Programs, rates, terms and conditions are subject to change without notice.

Bank of America Corporation and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.