I’ve heard of them and am interested in more info just wanted to see if someone had a briefing before I went in depth?
In: Economics
A HELOC, or home equity line of credit, is a line of credit where the collateral is the equity in your home.
Now what does all that mean? A “line of credit” means that someone agrees they will loan you money up to a certain amount, but the agreement doesn’t say beforehand exactly how much they’re going to loan you. A credit card is a great example of this. When you use a credit card, you’re borrowing money from the credit card company. You can borrow money up to the credit card’s limit, and you have to pay that money back.
Now, what’s collateral? Collateral is basically a guarantee when you take out a loan, saying “if I don’t pay back this loan on time, you can take this”. So, if you don’t pay off the money you take out of your HELOC on time, then you lose the equity in your home.
Now, what’s the equity in your home? When you buy a home, you typically have a mortgage. This means that you got a loan from the bank using your house as collateral. But, due to down payments and as you pay off your mortgage, the value of your house will be greater than what you owe on your mortgage. This difference is your “equity” in the house. Basically it can be thought of as the part of your house that you own completely no matter what, as opposed to the part that the bank owns if you fail to pay your mortgage.
Put all this together again, and what do you have? You have something kinda like a credit card, but if you don’t pay it off, they take your house like a mortgage would, so the interest rate is much lower than a credit card. You can get a HELOC for something like 60-80% of however much equity you have in your home (your home’s value minus what you still owe on the mortgage). People use this typically for big expenses, especially home renovations since those will increase your home’s value, and thus your equity.
Latest Answers