A home equity line of credit (HELOC) lets you borrow against the equity in your home, up to a limit, and repay it on your own schedule. It is a revolving credit line, not a fixed loan with a set payment and end date.
How it works
- Limit: set by the lender from your home’s value and the amount you already owe on the property. Many lenders cap total borrowing (mortgage plus line) at a share of the home’s value. Ask your lender for the exact cap.
- Interest: usually variable, tied to the lender’s prime rate plus a spread. Your rate can move when prime moves.
- Repayment: most lines require at least the monthly interest. You can repay principal whenever you like and borrow again up to the limit.
How it fits with your mortgage
A HELOC can be a separate loan, or a secured line combined with your mortgage (a “collateral” or readvanceable mortgage). Check which one you are getting, because it changes what happens at renewal and when you break the mortgage. A readvanceable mortgage can also lower your available credit as your mortgage balance goes down.
Costs to compare
- Interest rate and how often it changes.
- Setup and appraisal fees, and any annual fee.
- Legal costs to register the charge on title, which are separate from the mortgage costs.
- Penalties: some lines have no prepayment penalty, but a combined product may be tied to your mortgage terms.
When a HELOC makes sense
- You need access to funds over time, such as renovations paid in stages.
- You want a reserve you can use only when needed.
- You can repay the balance and keep the interest manageable if rates rise.
When to be careful
- Using the line to fund spending, not an asset or a planned project.
- Interest-only payments that never reduce the balance.
- Borrowing up to the limit when your income could fall.
Lending rules, limits and fees differ by lender and change over time. This guide is general information, not financial advice. Confirm the terms in writing before you sign.
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