What does HELOC stand for?

You've been paying your mortgage and improving your home, and you've built up your home equity. Now you want to put it to use, but you're not sure of the best way and the jargon makes it hard to figure out the right strategy.

A HELOC is one common way to use (or tap into) your home's equity. HELOC stands for home equity line of credit. 

HELOCs have both advantages and disadvantages. A deeper look into the definition of a HELOC could help you understand whether it's a good option for your needs. 

What is a home equity line of credit?

The name home equity line of credit describes what it is pretty well:

• Home equity means what you borrow is secured by the value of your home

• Line of credit describes a set amount of money you can borrow from, repay, and borrow again up to your credit limit over and over.

The equity in your home is the market value of the property minus any mortgage balances on the home. A HELOC lender uses the equity you have in your home to set your borrowing limits and your home secures the credit line.

Borrowing against home equity gives lenders enough security to offer different interest rate structures than personal loans . This generally makes HELOCs a lower-interest way to borrow than personal loans. 

HELOCs are revolving lines of credit. The term revolving means you can take money from the line of credit up to your credit limit, repay it, and then borrow again later on. You can do this multiple times while the line of credit is active. 

Lower interest rates and the flexibility to borrow at different times are key advantages of a HELOC. Homeowners often consider a HELOC for things like:

• Home improvement projects

• Consolidating higher-interest debt

• Covering large planned expenses over time

As with any mortgage, if you don't repay the loan you could lose your home. So it’s a good idea to balance the advantages of a HELOC against the potential risk of taking on a loan secured by your home.

How does a HELOC work?

HELOCs are usually set up to last for five to 30 years. They have two phases:

• Draw period. During this time you can borrow money up to your credit limit, repay it, and borrow again, as often as you like. The only limitation is that the total amount you owe at any time can’t go above your credit limit. This flexibility could help you cut down on interest costs and make the money available to borrow again later in the draw period. Draw periods generally last up to 10 years depending on the lender.

• Repayment period. This starts once the draw period ends. You can't draw from the credit line anymore. During the repayment period, you'll repay what you owe on a monthly schedule. This repayment period could be anywhere from 10 to 25 years.

The size of the line of credit you can get is based largely on how much home equity you have. Lenders also look at your other financial qualifications:

• Income

• Expenses

• Credit history

The size of the line of credit is determined when you open the HELOC, but lenders may adjust that amount if conditions such as the value of your home change significantly.

When you borrow money from the line of credit, you'll pay interest on the amount you owe. Your interest rate may be fixed or variable:

• Fixed interest rate means the rate you pay on any money you borrow will stay the same throughout the life of the HELOC.

• Variable interest rate means the rate can go up or down as economic conditions change. This is unpredictable—depending on which way rates go, this can make payments cheaper or more expensive. 

In addition to interest you’ll pay on the money you borrow, you might also pay fees to set up and maintain the HELOC. 

When it comes time to choose a HELOC, think through how interest rates and fees are likely to apply based on how you plan to use the line of credit. That way you can compare offers to decide which best fits your needs.

HELOC vs. home equity loan

HELOCs and home equity loans both let homeowners borrow against their equity, with some important differences. Here's a quick comparison:

Neither option is better for all situations. The right fit depends on your goals and how you plan to use the funds. 

Is a HELOC right for you?

A HELOC may be worth exploring if you:

• Have sufficient equity built up in your home

• Are comfortable using your home as collateral

• Prefer flexible access to funds rather than a one-time loan

• Compared interest rates and found a HELOC competitive with other options.

As a homeowner, you know that financial needs don't happen all at once. Different goals and expenses may call for funding at various times over the years. 

HELOCs are designed to give borrowers the flexibility to meet needs that crop up at different times and in different amounts. If you think a HELOC is the right strategy, the next step is to prequalify with lenders to compare rates. 

You can check your rate through Achieve Loans with no impact to your credit scores. That way, you can decide if the cost and benefits of a HELOC are a good fit for your financial needs in the years ahead.