How Does a HELOC Work?

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If you want to borrow some money to consolidate funds or purchase a big-ticket item, a home equity line of credit (HELOC) may help. A HELOC is a form of revolving credit secured by your home equity. This is an open ended loan that may be paid down or charged up for the term of the loan, similar to a credit card. The rate of interest can fluctuate (generally monthly).

The lender will specify your credit limit (the highest amount you may borrow) with the HELOC. In setting the credit limit, your pay-rate, outstanding debt, credit status and other financial obligations will be taken into account. You will be required to have an appraisal to assess your home's up-to-date market value. Your credit limit will be set on all of your financial information, in addition to a fraction of your home's appraised market value, which is subtracted from the balance owed on your existing mortgage loan.