How Does a HELOC Work?

If you need to borrow cash to consolidate funds or make a big-ticket purchase, a home equity line of credit (HELOC) may be useful. A HELOC is a type of revolving credit secured by your home equity. This is an open ended of loan that may be paid down or charged up for the term of the loan, much like a credit card. The rate of interest fluctuates (generally monthly).

Your lender will specify your credit limit (the maximum amount you can borrow) in the HELOC. Your credit score, income, debt and various other financial circumstances will affect your credit limit. You will be required to have an appraisal to determine your home's current value. Your credit limit will be set on all of the above, in addition to a percentage of your property's appraised value, which is subtracted from the balance owed on your current mortgage.