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

A Home Equity Line of Credit (HELOC) is a financial product that allows homeowners to borrow money against the equity they have built up in their home. This type of loan operates like a revolving line of credit, meaning that borrowers can draw funds as needed, up to a specified limit, similar to how a credit card works. The amount of credit available is determined based on the homeowner's equity, calculated as the difference between the home's market value and the outstanding mortgage balance.

HELOCs are particularly appealing because they offer flexibility; homeowners can withdraw money for various purposes, such as debt consolidation, education expenses, or emergencies. The funds can be used however the borrower chooses, without restrictions to specific expenditures like home renovations. Additionally, during the draw period, borrowers typically only pay interest on the amount they have drawn, making it a potentially cost-effective option for accessing funds.

Understanding this concept is crucial as it distinguishes HELOCs from other types of loans, such as fixed-rate mortgages or specific-purpose loans, which have more defined terms and uses.