How a HELOC Works
Unlike a home equity loan, which is a lump-sum payment, a HELOC works more like a credit card. You can borrow as much or as little as you need up to your credit limit during the "draw period."
As you pay back the principal, the credit becomes available for you to use again. After the draw period ends, you enter the repayment period, where you must pay back any outstanding balance over a fixed term.
Pros and Cons of a HELOC
- Lower Interest Rates: Often lower than credit cards or personal loans because it is secured by your home.
- Flexible Borrowing: Only borrow what you need when you need it.
- Variable Rates: Most HELOCs have variable rates, meaning your payments can increase if interest rates rise.
- Risk to Your Home: If you fail to make payments, your lender can foreclose on your home.