How Does a HELOC Work?

If you have a need for some extra money to make a major purchase, renovate your house, or pay the balance on a high-interest credit card, a HELOC (home equity line of credit) might be just what you are looking for. Using your home equity as collateral, a HELOC is revolving credit. This open-ended loan can be charged up or paid down during the set term of the loan. The rate of interest can fluctuate (generally every month).

In a HELOC, the lending institution will approve you for a predetermined credit amount - the maximum sum you may borrow at any one time. In deciding the credit limit, your salary, debts, credit history and other financial circumstances will be reviewed. You are required to do a home appraisal to assess your home's present value. Your home's current value, subtracted from your remaining mortgage loan balance will help to determine your specific credit limit.