NEXT STEPS

What is a Home Equity Line of Credit (HELOC)?

​

A home equity line of credit is a type of second mortgage that allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Borrowers can use HELOC funds for a variety of purposes, including home improvements, education and the consolidation of high-interest credit card debt.

How Does Home Equity Work?

​

First, what exactly is home equity? If you used a mortgage to purchase your home, you may joke that “I don’t own my home; the bank does.” But that’s not entirely true. Each time you make a payment on your mortgage, you add to the amount of your home that you own.

This doesn’t mean that, say, with this month’s payment you own the windows and with next month’s you’ll own the floorboards, but rather that you own a certain portion of the home’s value outright.

So, say your home is worth $250,000. When you purchased the house, you put down 20%, or $50,000. That means that as soon as your closing was completed, you had $50,000 of equity in your house. Then, after a few years of living in the house and making regular payments, you’ve got the balance of what you owe your lender down to $180,000. Assuming your home is still worth $250,000, that means you have $70,000 worth of equity built up in the house.

Put simply, your equity is the amount your house is worth minus what you currently owe your lender.

​

Using Your Home Equity

​

Once you have a good chunk of equity built up, you can let it sit and continue to grow, or you can utilize it if you have a need for a large sum of money.

This is where HELOCs or other types of home equity financing come in. The equity you have in your home is used as collateral for the loan, meaning you’ll likely be able to get a lower interest rate than you would with an unsecured personal loan. Plus, depending on how much equity you have in your home, you may be able to borrow significantly more money than you could with a personal loan.

An important reminder: tapping into your home’s equity can be a helpful source of cash for homeowners, but it’s something that should be approached with a lot of caution and consideration for how it could affect your financial situation.