What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is fundamentally a type of loan that allows homeowners to borrow against the equity they have built up in their home. Equity is the difference between the market value of the home and the outstanding balance of any existing mortgage loans. By using a HELOC, borrowers can access funds for various purposes, such as home improvements, debt consolidation, or other expenses, often at a lower interest rate compared to unsecured loans because HELOCs are secured by the borrower's home.

The nature of a HELOC is akin to a revolving line of credit, enabling borrowers to draw funds as needed up to a certain limit during a predefined draw period. They are typically available at variable interest rates, which means that payments can fluctuate over time based on changes in interest rates.

Understanding the specific functions and conditions of a HELOC is essential for both lenders and borrowers, distinguishing it from other types of financing such as fixed-rate mortgages, government grants, or specific repayment terms associated with different loan types.