A home equity line of credit (HELOC) is a second mortgage on the equity already in the home.They work like credit cards, but often have lower interest rates. You borrow against the money you have invested in your home, usually to consolidate other high-interest loans. HELOCs can be fixed-rate or adjustable rate loans.
Your payment plan has two parts:
- Draw period: For the first term, you can borrow as much of your home’s equity as you want. You only pay interest during this period.
- Amortization: You have to start paying principal and interest on your debt.
The good news:
- This is a smart choice if you can get a low interest rate. This lets you pay off high-interest debt (like credit cards) or pay for emergencies.
- If you have a strong credit score, you can get very low fixed rates.
- The interest you pay on a HELOC may be tax-deductible.
The bad news:
- Borrowing against your house can backfire. The biggest risk is that you could lose your home if you aren’t able to pay back the loan.
- Be careful about paying off your debts. It’s not worth risking all the equity you’ve built up, if you can’t pay off your HELOC in the end and just wind up deeper in debt. Work on your overspending habits instead.