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HELOC, pronounced HEE-lock, is the US financial industry’s abbreviation for Home Equity Line of Credit. It is a loan with a maximum amount based on the available equity in the borrower’s home. Equity is the difference between a home’s value and the full amount owed on it. A HELOC is different from a home equity loan because it is a line of credit rather than an advancement of an entire sum all at once.
There are both advantages and disadvantages to a HELOC. The biggest advantage most borrowers realize is the tax-deductible interest for most individuals who itemize when filing their federal income tax. This line of credit is also not viewed by creditors the same way as a second mortgage in terms of overall debt. A HELOC is not advantageous in every circumstance, however.
The disadvantages of a HELOC include variable interest rates, which are almost always imposed. This means that, in most situations, the interest rate attached to the line of credit will rise over time. How much and how often it goes up depends on the lender’s terms and the borrower’s credit rating. Additionally, many times, the loan requires only the regular repayment of interest only, meaning the principal may never decrease if the borrow pays only the minimum payment due each month.
A HELOC has a degree of flexibility that other loans do not have, including access to a maximum amount without actually using it and varying degrees of repayment terms. Though it's different than a home equity loan or second mortgage, it is still a loan secured by the borrower’s home as collateral. Therefore, the failure to adhere to the agreed upon terms can, and often does, result in foreclosure. Before agreeing to this type of loan as a way of funding a major purchase or creating accessible credit, it is best for a homeowner to consult with a financial advisor or lending professional.
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