A home equity line of credit, HELOC, equity line, or equity account, is a type of loan that allows a home owner to tap into the equity of their home to obtain cash for other uses. Home equity lines of credit are usually, but not always, second mortgages. A second mortgage or loan is a mortgage that a homeowner takes out on their home above and beyond their first mortgage. Most home equity lines allow an individual to borrow up to 85% of the appraised value of their home minus the amount they still owe on their first mortgage.
A HELOC works similar to a revolving line of credit or credit card. It is set up for a maximum credit amount. A borrower does not typically have to take out any money up front. They can use the available credit to make purchases on an as-needed basis.
Home equity lines of credit can be in a first, second, and even subsequent lien position.
When a consumer opens a home equity account, they have three days to cancel the transaction, for any reason. They must cancel the account in writing.
HELOC Interest Rates
HELOCs usually have variable interest rates which are typically tied to the prime interest rate. The interest due on a HELOC is calculated on a daily basis based on the outstanding balance. HELOCs do not have interest rate adjustment caps, so if the prime interest rate were to go very high, the interest rate on a HELOC would also be high. The maximum interest rate that may be charged on a HELOC is 18%, except in North Carolina where it is 16%. Some home equity lines of credit do allow conversion to a fixed-rate loans.
Home equity lines typically have a draw period of five to ten years, followed by a repayment period of 10 to 20 years. There are many variations on this theme.
Up front costs for obtaining a home equity line of credit are typically low. Many lenders charge no fees to set up a HELOC. Some lenders charge continuing annual fees or access fees.
Uses for a Second Mortgage
The most common uses for a home equity line of credit is to obtain equity from a borrower's home for some other purpose. Typical uses for the money obtained from a HELOC may include: