HELOC: How Does It Work

When you’re looking for a way to access the equity in your home, a Home Equity Line of Credit (HELOC) might be one of your top options. Whether you’re planning to make home improvements, consolidate debt, or fund other large expenses, a HELOC can provide the flexibility you need. But how exactly does a HELOC work, and what should you know before deciding if it’s right for you?

In this post, we’ll break down everything you need to know about HELOCs—from how they work, to the pros and cons, and how to use a HELOC payment calculator to better understand your financial options.

What Is a HELOC?

A Home Equity Line of Credit (HELOC) is a type of loan that allows homeowners to borrow against the equity they’ve built in their home. Equity is the difference between what your home is worth and how much you owe on your mortgage. Essentially, a HELOC works like a credit card in that you can borrow money up to a set limit, and interest accrues only on the amount you use.

Key Features of a HELOC:

1. Revolving Credit: Just like a credit card, you can borrow, pay down, and borrow again during the draw period (usually 5-10 years).
2. Variable Interest Rates: Many HELOCs have variable interest rates, which means the rate can change over time based on market conditions.
3. Repayment Period: After the draw period ends, you enter the repayment period, where you’ll need to pay both principal and interest.

How Does a HELOC Work?

The process of obtaining and using a HELOC is similar to getting a mortgage, but with a few key differences. Here’s how it works:

1. Application Process: To apply, you’ll need to submit an application along with documentation such as proof of income and estimated property value.
2. Approval Process: Lenders will typically require you to have a certain amount of equity in your home (usually at least 15%–20%). The amount you can borrow will depend on factors like the value of your home, your credit score, and your debt-to-income ratio.
3. Draw Period: After you’re approved, you enter a “draw period” where you can borrow from your HELOC. During this time, interest accrues only on the amount you use.
4. Repayment Period: After the draw period ends, you’ll enter the repayment period, where you’ll have to pay back both principal and interest. This can last 10–20 years, depending on your agreement.
5. Flexibility: You can use your HELOC for any major expenses, but it’s often used for home improvements, debt consolidation, or other large purchases.

At Sound Credit Union, we provide comprehensive support through each step of the HELOC process. Our experienced team will help you evaluate your home equity and find the best terms that fit your financial goals.

Difference Between HELOC and Home Equity

The terms HELOC and home equity are often used interchangeably, but they refer to different things. Here’s a breakdown:

• Home Equity: This is the value of your home minus what you owe on your mortgage. If your home is worth $300,000 and you owe $200,000, your home equity is $100,000.
• HELOC: This is a loan that lets you borrow against your home equity. It works as a revolving line of credit, meaning you can borrow, repay, and borrow again during the draw period.

In short, home equity is the value of your property that you’ve paid off, while a HELOC is a loan you can take out based on that equity.

HELOC Pros and Cons

Like any financial product, a HELOC comes with its own set of pros and cons. Here are some key advantages and disadvantages to consider:

Pros:

• Lower Interest Rates: HELOCs typically offer lower interest rates compared to credit cards or personal loans.
• Flexible Borrowing: You can borrow exactly what you need when you need it.
• Potential Tax Benefits: If you use your HELOC for home improvements, you may be able to deduct the interest paid on your taxes.

Cons:

• Risk to Your Home: Because your home is used as collateral, you could lose it if you fail to repay the loan.
• Variable Interest Rates: Many HELOCs have variable rates, which means your payments can fluctuate.
• Potential Fees: Some HELOCs come with annual fees, transaction fees, or early repayment penalties.  However, at Sound Credit Union, there are no upfront fees —no application fees, processing fees, or closing costs.

Popular Uses of HELOCs

Using a HELOC For Debt Consideration

A HELOC for debt consolidation is a popular strategy for people who have high-interest credit card debt or other loans. By consolidating your debts with a HELOC, you may be able to secure a lower interest rate and reduce your overall debt burden. This strategy can be effective, but it’s important to be disciplined with your borrowing habits to avoid accumulating more debt.

HELOC on Investment Property 

Some homeowners use a HELOC on investment property to finance new investments, repairs, or other expenses. However, keep in mind that the requirements for a HELOC on an investment property may differ from a primary residence. Lenders may have stricter guidelines or charge higher interest rates due to the increased risk.

How Much HELOC Can I Get?

The amount you can borrow through a HELOC depends on your home’s equity and the lender’s specific requirements. Most lenders will allow you to borrow up to 85% of your home’s value, minus any remaining mortgage balance.

For example:

• If your home is worth $300,000 and you owe $150,000 on your mortgage, you might be able to borrow up to $150,000 through a HELOC.
• However, this depends on your creditworthiness, the lender’s specific guidelines, and other factors.

Is a HELOC Right For You?

A Home Equity Line of Credit can be a powerful tool for managing large expenses, consolidating debt, or making home improvements.

Before moving forward, it’s important to assess how much you can borrow, your ability to repay, and how a HELOC compares to other financing options, like a mortgage.

Contact Sound Credit Union for guidance—we’ll help you navigate your options and ensure you’re making the best decision for your financial future.

HELOC Payment Calculator

Wondering what your monthly HELOC payments will look like? Use our HELOC Payment Calculator to estimate your payments based on your credit line, interest rate, and loan term. 

Explore Your Options With Sound Credit Union

Ready to explore your HELOC options? Sound Credit Union is here to help! Our experienced team is available to answer any questions, assist with your application, and help you get started on the right foot.

Contact Sound Credit Union today to discuss your HELOC options and find the perfect fit for your financial goals.