How Does a HELOC Work?

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When you want to borrow money to consolidate funds or make a big-ticket purchase, a home equity line of credit (HELOC) might be useful. Using your home equity as collateral, a HELOC is revolving credit. This is an open ended of loan that may be paid down or charged up for the term of the loan, similar to a credit card. The interest rate changes (generally every month).

Your lender will determine your credit limit (the maximum you can borrow) with the HELOC. Your credit status, rate of pay, debt and other financial information can affect your credit limit. You will be required to schedule an appraisal on your home to determine your home's up-to-date value. Your credit limit will be set on all of the above, in addition to a fraction of your home's appraised value, which is subtracted from the balance owed on your present mortgage loan.