A home equity line of credit (HELOC) is a type of loan that allows a homeowner to borrow against the equity in their home. Equity is the difference between the value of the home and the amount still owed on the mortgage. A HELOC is similar to a credit card, in that the borrower is approved for a certain amount of credit and can borrow against it as needed, paying interest only on the amount borrowed.
To qualify for a HELOC, a borrower typically needs to have a good credit score and a low debt-to-income ratio. The lender will also consider the value of the home and the amount of equity the borrower has in it.
A HELOC typically has a variable interest rate, meaning that the interest rate can change over time based on market conditions. The interest rate is usually based on a benchmark rate such as the prime rate, plus a margin.
HELOCs are commonly used for home improvement projects, debt consolidation, and other large expenses. However, it’s important to remember that a HELOC is a secured loan and if the borrower is unable to make the payments, their home may be at risk of foreclosure.
It’s important to shop around and compare different HELOC offers from different lenders, to find the best terms and interest rate. Additionally, it’s best to consult with a tax professional, as interest paid on a HELOC may be tax-deductible.