How Does a HELOC Work?

If you need some extra money to make a large purchase, renovate your house, or pay the balance on a high interest credit card, a HELOC (home equity line of credit) might be just what you need. Using the equity in your home as collateral, a HELOC is revolving credit. This is an open-ended loan that may be paid down or charged up for the a set length of time, similar to a credit card. The rate of interest fluctuates (typically monthly).

Your lender will set your credit limit (the highest amount you may borrow) with the HELOC. In setting the credit limit, your income, outstanding debt, credit history and any other financial circumstances will be taken into account. You are required to do an appraisal of your home to determine your home's up-to-date market value. Your credit limit will be set considering all of the above, as well as a fraction of your home's appraised market value, which is then subtracted from the balance owed on your current mortgage.