HELOCs Definition

What Is a Home Equity Line of Credit (HELOC)?

A home equity line of credit, or HELOC, is a second mortgage that uses your home as collateral to let you borrow up to a certain amount over a 10-year “draw” period, after which you have to start repaying the loan. A HELOC might be a good idea if you need to do home repairs or make other improvements. Here are some things to consider before applying for a HELOC.

Do You Qualify?

To qualify for a HELOC, you typically need:

Equity in your home: Most lenders require you to have at least 20% equity in your home after taking out the HELOC.

A good credit score: You’ll need a FICO® Score of at least 620 to qualify for a HELOC from most lenders.

A steady income: Lenders want to see that you have a steady income to repay the loan.

Is a HELOC Right for You?

There are some advantages and disadvantages of taking out a HELOC. Consider these factors before deciding if a HELOC is right for you:


You can use the money for anything: The funds from a HELOC can be used for any purpose, unlike a home equity loan, which must be used for expenses related to your home.

The interest may be tax-deductible: Interest paid on a HELOC may be tax-deductible if the funds are used for home improvements.


You could lose your home: If you can’t repay the loan, the lender could foreclose on your home.

The interest rate is variable: The interest rate on a HELOC is variable and could increase, which would increase your monthly payments.

You may have to pay fees: There are typically fees associated with taking out a HELOC, such as an annual fee, a closing cost and appraisal fee.

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