HELOC Basics: How a Home Equity Line of Credit Works

HELOC loans let you borrow against the equity in your home, which is the difference between what the home is worth and what you still owe, without selling it or replacing your current mortgage. A home equity line of credit (HELOC) is a revolving line secured by your home: you draw what you need, repay it, and can draw again during a set period. Below you will find how the two phases work, what a HELOC costs, the risks, and how it compares with a cash-out refinance.

How a HELOC Works

A HELOC is a revolving line of credit secured by your home. Instead of receiving one lump sum, you are approved for a maximum amount and can borrow from it as needed, repay it and borrow again during a set time frame. In that way, it works more like a credit card than a traditional loan, but usually at a lower interest rate because your home secures it.

How much you can access depends on your home’s value, your current mortgage balance, your credit and your income. Lenders generally limit the combined total of your mortgage and HELOC to a percentage of your home’s value.

The Two Phases

The draw period

This is the window, often several years long, when you can borrow from the line. During this time, many HELOCs require only interest payments on the amount you have used, although you can typically pay down principal too. You can usually access funds through online transfers, checks or a card.

The repayment period

Once the draw period ends, you can no longer borrow, and you begin repaying both principal and interest over a set term. Payments often rise at this point, so it is important to plan for that change from the start.

Rates and Costs

Most HELOCs have variable rates, which means your rate and payment can change over time with the market. Some lenders offer the option to lock a fixed rate on part of your balance. Ask about any fees, such as appraisal, annual or early closure fees, so you understand the full cost.

Common Ways People Use a HELOC

• Home improvements: Kitchen remodels, new roofs, additions or energy upgrades
• Debt consolidation: Paying off higher-interest balances, though this works only if you avoid running them back up
• Large or ongoing expenses: Education costs or projects that happen in stages
• A financial safety net: Having access to funds for emergencies, even if you never draw on it

If you use the money to buy, build or substantially improve your home, the interest may be tax-deductible in some cases. Check with a tax advisor about your situation.

Risks to Keep in Mind

A HELOC can be a helpful tool, but your home is the collateral. If you cannot make payments, you could put your home at risk. Before borrowing, consider:

• Whether your budget can handle a higher payment if rates rise or when repayment begins
• How stable your income is
• Whether you have a clear plan for what you will use the funds for and how you will repay them

Tips for Using a HELOC Wisely

Borrow only what you need for a specific purpose, and pay more than the minimum during the draw period when you can. Keep an eye on your rate and balance, and avoid treating the line like spending money.

HELOC or Cash-Out Refinance?

A HELOC lets you keep your existing first mortgage, which can be appealing if you like your current rate. A cash-out refinance replaces your mortgage with a new, larger loan and gives you a lump sum. The right choice depends on how much you need, how you will use it and your current loan terms.

Explore Your Options

If you are thinking about tapping your equity, learn more about our HELOC options and contact FLO Mortgage. A loan officer can help you compare choices and find the approach that fits your goals.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.

HELOC Loans: Frequently Asked Questions

What is a HELOC loan?

A HELOC (home equity line of credit) is a revolving line of credit secured by your home. People often call it a HELOC loan, but instead of one lump sum you borrow what you need, up to an approved limit, during a draw period and repay it afterward.

How does a HELOC work?

A HELOC has two phases. During the draw period you can borrow, repay and borrow again, and many lenders only require interest payments on what you have used. In the repayment period you can no longer borrow and you repay principal and interest. Terms, rates and fees vary by lender and borrower.

What is the difference between a HELOC and a home equity loan?

A home equity loan gives you one lump sum with a set repayment schedule. A HELOC is a revolving line you draw from as needed, and its rate is often variable. Which fits better depends on how and when you plan to use the funds.

How much can I borrow with a HELOC?

It depends on your home’s value, your current mortgage balance, your credit and your income. Lenders generally limit the combined total of your mortgage and HELOC to a percentage of your home’s value. All options are subject to approval.

Does FLO Mortgage offer HELOCs in Florida?

Yes. FLO Mortgage offers home equity lines of credit on primary homes, second homes and investment properties in Florida. You can check your options online in minutes, subject to approval.

Ready to see where you stand? Check your HELOC options, or learn more about working with a Florida mortgage broker. FLO Mortgage, NMLS #1835856. Subject to approval; this is not a commitment to lend.