Definition:
A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows homeowners to borrow against the equity in their home, typically using the home as collateral.
Example:
Mark has paid off a large portion of his mortgage and now has $200,000 in equity in his home. He opens a HELOC for $50,000 to renovate his kitchen. Instead of taking the full amount at once, he draws funds as needed and only pays interest on what he uses.
Explanation:
A HELOC works like a credit card but is secured by your home. Lenders determine how much you can borrow based on your home’s equity (the difference between what your home is worth and what you still owe on the mortgage). You’re approved for a credit limit, and you can borrow, repay, and borrow again during the draw period, which often lasts 5 to 10 years.
During this time, most HELOCs require interest-only payments. After the draw period, the loan enters the repayment period, where you begin repaying both principal and interest over a set time, often 10 to 20 years.
HELOCs are commonly used for home improvements, education costs, debt consolidation, or emergency expenses.
Why is Home Equity Line of Credit (HELOC) Important in Real Estate Transactions?
HELOCs are important because they give homeowners access to flexible, low-interest financing using the equity they’ve built. For buyers, understanding HELOCs is useful when planning future renovations or financial strategies. For sellers, an active HELOC must be paid off during the sale, as it places a lien on the property. Knowing how HELOCs work ensures smoother transactions and helps all parties plan better—especially when managing finances around a home purchase or sale.