Pop quiz: How much home equity do you have? If you haven’t done the math in a while, that number may be bigger than you think.
“There’s a record amount of equity out there right now,” says Molly Boesel, a principal economist at CoreLogic, a property information and analytics provider.
U.S. homeowners with a mortgage gained an average of $16,200, or 12.3%, in home equity from the second quarter of 2017 to a year later in 2018, according to CoreLogic’s most recent Homeowner Equity Insights Report.
Want to get your hands on some of that rising value? One way to tap it is with a home equity line of credit, often referred to as a HELOC.
With a HELOC, you can borrow as much of your available equity as you want during an initial draw period, typically around 10 years. You’ll make payments in this phase, but they might be interest-only. When the draw period ends, things get serious.
During the repayment phase, typically 10 to 20 years, HELOC payments include principal and interest. Payments during this time may be drastically larger than your draw-period payments — a shocking change if you’re not ready for it.
“You always want to be careful when you use your home equity as collateral for a loan,” says Rod Raszler, vice president of second trust originations at PenFed Credit Union. “You’ve got to make sure that you’re doing it prudently and factoring in your ability to repay that loan.”
Deciding if a HELOC is right for you means asking questions. You’ll find answers below to some of the most common ones, in 10 words or less.
What exactly is a HELOC? A line of credit secured by your home equity.
How is a HELOC different from a home equity loan, or HEL? HELOCs provide revolving credit, while HELs offer a lump sum.
How much home equity do I have? Subtract your mortgage balance from your current home value.
How much equity do I need for a HELOC? Ideally, more than 20% equity.
How much can I borrow with a HELOC? About 80% of your home’s value minus the mortgage balance.
How much does a HELOC cost? Upfront costs, interest rates and ongoing fees vary by lender.
What’s a good reason to get a HELOC? To finance improvements or repairs that increase home value.
How are HELOC funds accessed? Via an account check or credit card, or online transfer.
How do I find the best HELOC lender? Compare terms, rates and fees, and don’t forget credit unions.
How is HELOC interest calculated? HELOCs typically use a variable rate, but fixed-rate options exist.
How do I get the best HELOC rate? Get at least three quotes and follow these nine tips.
Is HELOC interest tax-deductible? Usually, if used to buy, build or improve your home.
Will a HELOC affect my current mortgage? No, but it could prevent you from refinancing.
Can I use a HELOC as an emergency fund? Yes, but try to avoid it due to foreclosure risk.
Can you refinance a HELOC? Yes, but watch out for early repayment or cancellation penalties.