Understanding Home Equity Lines of Credit (HELOCs)
If you’re a homeowner, you may have heard the term “Home Equity Line of Credit” or HELOC (some financial institutions may also call these a Home Equity Credit Line or HECL). But what exactly is a HELOC, how can it be used, and how can it benefit you? Let’s break it down.
By UFirst Credit Union | January 1, 2025
What Is a HELOC?
A HELOC is a revolving line of credit secured by the equity you’ve built in your home. Equity is the difference between your home’s current market value and what you still owe on your mortgage. With a HELOC, you can borrow against this equity, giving you access to funds when you need them, up to a predetermined limit.
Unlike a traditional loan, where you receive a lump sum upfront, a HELOC allows you to draw funds as needed during what’s called the “draw period,” which typically lasts 5 to 10 years. During this time, you’ll often pay only interest on the amount you’ve borrowed. After the draw period, the repayment period begins, during which you’ll repay the principal and interest.
How Can a HELOC Be Used?
One of the greatest advantages of a HELOC is its flexibility. Here are just a few common ways homeowners use their HELOCs:
- Home
Improvements
Whether you’re renovating your kitchen, adding a new deck, or updating your bathroom, a HELOC can help you fund projects that increase your home’s value. - Debt
Consolidation
You can use a HELOC to consolidate high-interest debt, like credit card balances or personal loans, into one manageable payment at a typically lower interest rate. - Emergency Expenses
Life is full of unexpected events. A HELOC can serve as a financial safety net for medical bills, car repairs, or other urgent needs. - Education
Costs
If you or a family member are pursuing higher education, a HELOC can help cover tuition or related expenses. - Major
Purchases
From buying a new car to planning a dream vacation, a HELOC offers a flexible way to finance big-ticket items.
How Can a HELOC Help You?
A HELOC can be a smart financial tool when used wisely. Here’s how it can benefit you:
- Lower Interest
Rates
HELOCs typically have lower interest rates than credit cards and unsecured personal loans, making them a cost-effective borrowing option. - Financial Flexibility
You borrow only what you need, when you need it, and pay interest only on the amount borrowed. - Tax
Advantages
In some cases, the interest you pay on a HELOC may be tax-deductible, particularly if the funds are used for home improvements. Be sure to consult a tax advisor for details. - Access to Funds
Over Time
During the draw period, you have ongoing access to your credit line, giving you peace of mind knowing funds are available if unexpected expenses arise.
Things to Keep in Mind
While a HELOC can be a valuable resource, it’s important to use it responsibly. Remember that your home serves as collateral, so if you fail to make payments, you risk losing your home. Be sure to budget carefully and borrow only what you can comfortably repay.
Ready to explore how a HELOC could work for you? Visit our Home Equity Line of Credit page to learn more about how it works, the benefits, and how to get started. Let us help you make the most of your home’s equity.
