Definition
A HELOC is a revolving line of credit secured by the equity in your home. Like a credit card, you can borrow up to your credit limit, repay it, and borrow again during the draw period. Unlike a credit card, a HELOC uses your home as collateral, typically offers much lower interest rates, and the interest may be tax-deductible when used for home improvements.
Example
Your home is worth $400,000 and you owe $250,000 on your mortgage. Your home equity is $150,000. A lender approves a HELOC for 80% of your home's value minus your mortgage balance: ($400,000 × 0.80) − $250,000 = $70,000 credit limit. You draw $30,000 for a kitchen renovation at 7.5% variable APR. Your interest-only payment during the draw period is $187.50/month ($30,000 × 0.075 / 12).
How It's Calculated
HELOC Credit Limit = (Home Value × LTV Limit, typically 80%) − Mortgage Balance. Monthly interest during draw period = Outstanding Balance × (Annual Rate / 12).
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