Everything You Need to Know About Home Equity Line of Credit

You are not alone if you are considering taking a loan. In the United States, more than 150 million people have loan accounts. There are several types of loans. There are student loans, auto loans, medical loans, credit card loans, bad credit loans, crypto backed loans and mortgages among others. In this article, we will look at home equity line of credit (HELOC) and tell you everything you need to know about them.

What is a Home Equity Loan?

A home equity line of credit is a type of loan that is offered by many financial companies. This type of a loan is also known as a second mortgage.

As the name suggests, you borrow money against the equity you have built on your home. For example, if you have a house that is worth more than $300,000 and you have a mortgage balance of $100,000. A bank or any other financial organization can give you a loan against the equity of the house.

In most cases, the lender will allow you to access up to 80% of the home value less the mortgage balance. This type of loan is known as Home Equity Line of Credit is also known as a HELOC. People take HELOC for various reasons. For example, some take a home equity line of credit to pay off debt while others take a home equity line of credit to buy a house. A study by CNBC found that most people take a HELOC for the following reasons.

Home Equity Line of Credit
Home Equity Line of Credit

How a Home Equity Line of Credit Work

The concept of a home equity line of credit is very easy to understand. It is much easier especially when you have a good understanding of how a credit card works. With a HELOC, you will have access to money for an extended period of time. After borrowing the money, you will pay the balance over time. A key difference between a HELOC and a credit card is that your ability to borrow against the equity of your house has a time aspect. This time is known as a draw period and it usually ranges between five years and ten years.

Home equity line of credit versus home equity loan:A home equity loans gives you a lump sum up front and it comes with fixed payments and a fixed interest rate for the term of the loan. On the other hand, HELOCs are revolving credit lines, which can last up to 10 years that usually don’t have fixed interest rate. Find out more about the difference between home equity loan and home equity line of credit.

How to Apply for a Home Equity Line of Credit

As with all types of loans, there is a process that you need to follow to apply for home equity loan. First, you need to ask yourself whether you do need the line of credit. This is a stage where you assess your needs and see whether you need the credit. If you don’t have a good need for a loan, we recommend that you don’t bother. Also, if you are taking the loan to buy liabilities, we recommend that you avoid it.

Second, you should have your home appraised. This is a process where a licensed valuer takes time to assess the real value of your home. Banks will always ask that you have the house valued. Some will even send their own valuers to do this.

Third, you need to find a company that offers these types of loans. Fortunately, in the United States, the number of organizations that offer Home Equity Line of Credit are so many. These include companies like Wells Fargo, Discovery, and Bank of America.

Fourth, after you file the papers, the bank will ask you a few questions, check how you pay your mortgage, and then give you the money. After borrowing the money, there are two primary methods of paying back. First, you can pay only interest in the balance you have borrowed. Second, you can pay back the principal you borrowed and the interest you have accumulated. You can access more money as you continue paying the principal.

What is a Home Equity Loan Used For?

Home improvement is the number one reason why most people take home equity loans. These people borrow these funds to help improve their houses, install solar energy, and do paintwork among others. By doing these improvements, the value of your home usually rises. Still, you are not limited on what you can do with a home equity loan. You can use the funds to pay school fees for your young ones, pay for medical needs, and also fund a wedding. The secret is that since a HELOC is a loan, you should ensure that you use the funds well.

Home Equity Line of Credit Vs Personal Loans

A common question is whether a HELOC is a personal loan. The two types of loans are actually personal loans. The main difference is that HELOCs usually have a variable interest rates. This means that the rate can change depending on the general interest rates. As such, they usually have lower interest rates. In the US, the Federal Reserve is the body required to set the base lending rates. Personal loans on the other hand have fixed interest rates. This means that the interest never changes.


A HELOC is an important method you can use to access credit. Indeed, the number of people who have taken this type of credit has been on the rise. This has been caused by the increasing value of their homes. According to CNBC, the value of home equity has risen to more than $14 trillion. This is s trillion more than its peak in 2005. Still, you need to think about the use of the loan and whether you can comfortably pay it.

Crispus is a finance professional with more than a decade experience in the industry. Over the years, Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, and Seeking Alpha. He also runs a Forex education and managed account company called WestEndFx.