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What is a HELOC?

A HELOC provides you with a line of credit that you can draw from as needed — similar to a credit card. You borrow against the equity in your home, and your home serves as collateral for the loan. HELOCs typically have much lower interest rates than credit cards, making them an attractive option to homeowners.

Here’s how a HELOC works

Unlike other home loans, a HELOC doesn’t give you a lump sum upfront. Instead, you’ll receive a line of credit that you can use for things like home renovation projects, debt consolidation, or any other major expenses.

You can borrow as many times as you want, up to your credit limit, during the loan’s draw period. Once the draw period ends, you’ll enter the repayment period to pay off your balance. HELOCs can have draw periods of up to 10 years and repayment periods of up to 20 years.

The amount you can borrow on a HELOC varies based on how much equity you have in your home and other factors. Generally, most lenders offer credit lines around 75% to 85% of your home’s appraised value, minus any outstanding loan balance you have on your first or second mortgage.

Let’s say your home is valued at $250,000:

$250,000 x 75% = $187,500

And you owe $120,000 on your first mortgage:

$187,500 – $120,000 = $67,500

In this scenario, assuming your lender caps the maximum loan-to-value ratio of 75%, you could potentially qualify for a HELOC with a maximum credit line of $67,500.

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