How Does a HELOC Work?

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A home equity line of credit (HELOC) can be helpful when you are looking to borrow a lump sum to remodel your home, make a large purchase, or consolidate debt. Using the equity in your home as collateral, a HELOC is revolving credit. This is an open-ended of loan that can be paid down or charged up for the term of the loan, similar to a credit card. The interest rate can fluctuate (generally every month).

With a HELOC, your lender approves you for a predetermined credit amount - the maximum amount you may borrow at any given time with the agreement. In determining the credit limit, your salary, outstanding debt, credit status and other monetary obligations will be reviewed. You will be required to do an appraisal to determine your home's present market value. Your property's current value, subtracted from your remaining mortgage balance will help to determine your particular credit limit.