If you're familiar with real estate financing, you may have heard the term "HELOC" (home equity line of credit) before. However, you may be wondering, "How does a HELOC work exactly?" If that question has been on your mind, you can stop wondering now: We've answered it for you below. Keep reading to learn how HELOCs work, how to qualify for one, and the pros and cons of using one to finance your next big expense.
How does a HELOC work?
As the name suggests, a HELOC is a revolving line of credit that lets you borrow against your home's equity to finance life's expenses. You can use a HELOC to finance renovations, pay for rental property expenses, and even as a down payment on a house. However, it's important to note that a HELOC functions more like a credit card than a traditional fixed-rate loan.
Instead of receiving the funds in a lump-sum payment, you're allowed to borrow funds up to your credit limit as you need them. Then, as you repay your outstanding balance, your home equity line is replenished, and you can continue to borrow against it for the remainder of your draw period, which is typically 10 years. Notably, during your draw period, you may only be required to make an interest payment on what you've borrowed.
After your draw period is up, you'll enter into your repayment period. You'll be expected to make a monthly payment that includes both the principal amount and the interest during the repayment period. By the end of your repayment period, your outstanding balance will be paid in full.