How Does a HELOC Work?

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A home equity line of credit (HELOC) can be helpful when you are needing to borrow a lump sum to renovate your home, make a large purchase, or consolidate debt. A HELOC is a form of revolving credit secured by the equity in your home. This is an open ended loan that can be paid down or charged up for the a set length of time, similar to a credit card. The rate of interest can fluctuate (generally every month).

With a HELOC, your lending institution will approve you for a predetermined amount of credit - the largest amount you are able to borrow at any one time under the plan. In determining the credit limit, your salary, outstanding debt, credit status and any other monetary obligations will be reviewed. An appraisal will be required on your home to determine the property's market value. Your credit limit will be determined 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.