A homeowner’s guide to HELOCs.

Thinking about a bathroom renovation? Planning on ways to pay for college expenses? Or maybe you’re looking for some extra cash to cover unexpected costs? No matter what it is, a home equity line of credit (HELOC) could be the answer.

A HELOC allows you to tap into your home’s equity as needed, making it a great option for ongoing expenses like home improvements, tuition, or emergency funds.

But how does it work, and how does it compare to a home equity loan? Let’s break it down.

How does a HELOC work?

A HELOC lets you borrow against your home’s available equity, using your house as collateral for the line of credit. Then, they function like a credit card, giving you access to a revolving line of credit with a variable interest rate.

HELOCs have a draw period and a repayment period. During the draw period you can borrow, repay, and borrow again as needed. Payments during this time are interest-only, keeping them lower. Once the repayment period begins, you can no longer withdraw funds and your payments will go to both principle and interest.

At STCU, the draw period is 10 years and the repayment period is 20.

What’s the difference between a HELOC and home equity loan?

While a HELOC offers flexibility, a home equity loan provides a lump sum with a fixed interest rate and fixed monthly payments. It’s more like a traditional loan.

A home equity loan is ideal for large, one-time expenses like a major renovation or debt consolidation. HELOCs on the other hand, are better for ongoing or unexpected expenses.

What are common uses for HELOCs?

• Home improvements: Fund renovations, repairs, or additions in stages.
• Tuition payments: Cover college expenses over several years.
• Emergency fund: Have a financial cushion for unexpected costs.
• Debt consolidation: Pay off high-interest debt in a more manageable way.

Helpful terms to know.

• Equity: The difference between your home’s value and what you owe on your mortgage.
• Draw period: The time when you can borrow from your HELOC.
• Repayment period: When you can no longer withdraw funds and must pay back both principal and interest.
• Lock: The option to convert a portion of your HELOC balance to a fixed rate for stability.
• Origination fee: Costs associated with processing and setting up your HELOC.
• Lien: A legal claim on your property until your loan is repaid.
• LTV (loan-to-value): A measure of how much you’re borrowing compared to your home’s value. A lower LTV usually means better loan terms.
• DTI (debt-to-income): The percentage of your income used for debt payments, which affects loan eligibility.
• AVM (automated valuation model): A tech-based home value estimate used in the loan approval process.

A HELOC can be a smart financial tool for people who need flexible access to funds. Whether you’re remodeling your home, paying for education, or just want a safety net, a HELOC gives you control over how and when you borrow.