What is a HELOC and how does it work?
A HELOC, or home equity line of credit, is a loan that lets you borrow against the equity in your home, with the home as collateral. If you have a mortgage, the line is a second loan and your mortgage stays as it is. You borrow during a draw period and pay back during a repayment period.
Key facts
| What it is | A line of credit that uses your home as collateral source |
|---|---|
| Your first mortgage | Stays as it is; the line is a second loan behind it source |
| Two stages | A draw period to borrow, then a repayment period to pay back source |
| Equity | Your home's value minus what you owe on your mortgage source |
| Rate on a draw | On the line we arrange, fixed for the full term of that draw source |
A HELOC lets you use the value you have built up in your home. Your home secures the line. This guide covers how the line works, what happens to your mortgage, and the risks.
How does a HELOC work?
A HELOC has two stages. First comes the draw period, when the line is open for borrowing. Then comes the repayment period. You can no longer borrow, and you pay back what you owe.
How draws work on the line we arrange is in the terms you get in writing before you sign.
What happens to my mortgage?
Nothing. A HELOC is a second loan. Your first mortgage, its rate, and its payment stay as they are. You make a payment on each loan.
If you are weighing a HELOC against a new, larger mortgage, see HELOC vs cash-out refinance.
What does a fixed rate on each draw mean?
Many HELOCs have a rate that can change over time. On the line we arrange, the rate on each draw is fixed for the full term of that draw. You get the terms in writing before you decide.
How much can I borrow?
It depends on your equity. Equity is your home's value minus what you owe on it. Lenders typically let you borrow up to a set share of that equity, and they look at all the loans on the home together.
They also review your income and monthly debts, how the home is used, who is on the title, and your credit history at the application stage.
What are the risks?
Your home is the collateral. If you fall behind or cannot repay on schedule, you could lose your home. Borrow only an amount you have a plan to repay.
Who does what?
Click Mortgage arranges the line and is not the lender. A licensed lender funds it. See how a HELOC works, from first questions to closing.
Questions people ask
Is a HELOC the same as a home equity loan?
No. A home equity loan pays one lump sum, usually at a rate set for the whole term. A HELOC is a line with a draw period and a repayment period. See HELOC vs home equity loan.
Does checking my options affect my credit score?
No. The first check is a soft inquiry. A hard inquiry may follow at the application stage with the lender.
Can I get a HELOC if my home is paid off?
It can be. With no mortgage, all of your home's value is equity. See HELOC on a paid-off house.
- Sources
- https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-line-of-credit-heloc-en-107/
- https://files.consumerfinance.gov/f/documents/cfpb_heloc-brochure.pdf
- https://www.consumerfinance.gov/rules-policy/regulations/1026/40/
- https://www.consumerfinance.gov/rules-policy/regulations/1026/16/
See what a line on your home could be.
A few questions, a soft credit check only, and your pre-approval decision by text and email.
Check what you can borrow