A Home Equity Line of Credit (HELOC) is a line of credit that allows you to borrow money using your home as collateral. Like a credit card, a HELOC offers a revolving line of credit you can draw from as needed. A HELOC often has a lower interest rate than some other types of loans, and the interest may be tax deductible.*

How do HELOCs work?

With a HELOC, you provide your home as collateral for a line of credit. You can borrow from the credit line, and as you pay back what you’ve borrowed, your available credit is restored (just like with a credit card). You can borrow as much or as little as you need during the draw period, which usually lasts 10 years, up to your set credit limit. After the draw period is over, you’ll start the repayment period, typically lasting 10 years, to pay off the remaining balance.

However, you must have sufficient equity in your home to qualify for a HELOC. This means the total amount of debt secured by your home must be less than the current market value of your home. Typically, you can borrow up to 85% of your home’s value, including the amount you still owe on any first mortgage and other debt secured by your house. Lenders also evaluate your credit score and credit history, along with other factors normally considered during a mortgage approval process such as employment verification, employment history, monthly income and current debt.

What’s the difference between a variable and fixed rate?

When your HELOC has a variable interest rate, it means the rate can change from month to month based on an index. An index is a financial benchmark used by banks and credit unions to set rates for various loans. Most banks and credit unions use the U.S. Prime Rate as the index for HELOCs. This means a variable interest rate will fluctuate based on changes in that index.

A fixed interest rate does not change from month to month, which makes repayment more predictable. When you open a HELOC, the interest rate is usually variable, but some lenders, including Bellco Credit Union, offer the option to lock in a fixed interest rate and repayment period. Make sure to discuss these options with the lender so you understand how and when you can secure a fixed rate, since doing so can protect you from rising interest rates during inflationary times.

What can I use a HELOC for?

A HELOC doesn’t limit you to borrowing only for certain expenses, so you can use the line of credit for various things. Some of the most common include:

• Home improvements such as renovations or landscaping that can increase your home’s value.
• Consolidating high-interest debt, such as credit card balances, into a single, lower-interest loan.
• Tuition and other education-related costs.
• Emergency expenses such as medical bills or urgent home repairs.
• Major purchases such as a vehicle or pricey appliance.

How do I apply for a HELOC?

Bellco and other lenders will require the same basic documents, and the process generally is as follows:

• Explore your options: Shop credit unions and banks to see which offers will best fit your needs based on your goals, and which offer flexible borrowing options (e.g., variable-rate vs fixed-rate advances).  
• Gather documents: Prepare proof of income, employment verification, first mortgage details, home value information and anything else that’s required.
• Determine if a home appraisal is required: The lender may require an appraisal to determine your home’s value.
• Apply: Submit your application with personal, financial and property details.
• Close: If approved, review the credit limit, interest rate, and repayment terms, then sign the necessary documents and pay any closing costs.

How do I manage a HELOC responsibly?

As with any line of credit, managing a HELOC responsibly is key to your financial health. Here are some tips:

• Avoid the temptation to use your HELOC for unnecessary expenses and instead, dedicate it to important projects or emergencies.
• Track your spending and ensure it aligns with your budget and repayment plan.
• Pay at least the minimum payment on time each month to avoid late fees and negative reporting on your credit report, which may damage your credit score.
• If possible, pay more than the minimum payment to reduce your principal balance faster and save on interest.  The more principal you pay, the more you will also have available to borrow in the future, in case of emergencies or unexpected expenses.

Interested in getting started?

Discover Home Equity ChoiceLine with Bellco, which enables you to lock in up to three fixed-rate advances at any one time.

*Please speak to a tax consultant about the deductibility of any payments made towards your HELOC.