How Does a Home Equity Line of Credit (HELOC) Work?


Establishing a line of credit to access your home’s equity is an important decision! You now have a flexible tool you can leverage to fund important endeavors, improve your home, or help support your financial well-being.

How does your HELOC work?

Here are some guidelines for typical HELOCs. If you have an agreement currently, check it for the specifics related to your account.

Spend your cash

Most people find it convenient to access their funds through account transfers or checks.

There are no restrictions on how you spend your funds. If you direct them to home repairs or upgrades, the interest may be tax deductible. Consult your tax advisor to be sure.

Start with interest-only payments

During your initial draw period, which is usually 10 years, you pay only the interest on the funds you’ve borrowed. The rate varies with the market, so you’ll want to keep an eye on your account statements to determine your minimum payment.

If you need help anticipating the payment for a particular expenditure, please reach out. The EHL Team is glad to help.

You can also pay toward your principal balance if you wish. The amount of the balance you pay down will be available to spend again until the end of your draw period.

Plan for repayment

After your draw period, you’ll begin making fixed principal and interest payments to repay the loan. Repayment terms are typically 10, 15 or 20 years and are spelled out in your agreement.

Remember your HELOC if you sell

If you choose to sell your home while your HELOC is open or in repayment, you will pay off the money you owe at the same time you pay off your mortgage.

If you choose to refinance your first mortgage, the HELOC will either need to be paid off or resubordinated (that simply means it goes back into a secondary lien position—the same as where it started with your existing first mortgage).

Strategies for Leveraging a HELOC For Your Financial Benefit:

BUY a second home or investment property.

Leveraging the equity in your primary home can be a smart way to make the down payment on a vacation home or rental property.

CONSOLIDATE high-rate consumer debt.

Transfer credit card balances to your HELOC to lower your rate and eliminate the stress associated with making multiple payments each month.

LOWER your overall monthly debt payments.

Pay off higher-rate balances more quickly by moving them onto your HELOC then adding the payment amount to your HELOC payment. This prevents extending the term of your other debts.

PAY for higher education.  

Give your kids a head start after college by helping them avoid student loans. Use your HELOC to cover tuition, travel, room, board and other expenses.

MAKE home improvements.

A new kitchen, bath, deck or other improvements can make your home more comfortable now and more marketable later if you decide to sell. HELOC funds spent on your home may be tax deductible. Always check with your tax advisor. 

There are many ways to make your HELOC pay. If you need help determining what your payments will be after any expenditures, we can help. Please reach out.

Contact Emerald Home Loans

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