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How Do HELOC Loans Work?

August 30, 2023

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At some point in your life, you may need access to more cash than what you have available. You could choose to get a loan, such as a home equity line of credit (HELOC), that uses the equity already available in your home.

So, how does this loan work? And what makes it different than a traditional loan or using a credit card? While it offers unique benefits, there are some things to know before you apply.

What is a Home Equity Loan?

A home equity loan is a loan that uses the equity in your home as security for your repayment. It's sometimes called a "second mortgage" because it uses your home as collateral to ensure you pay it back. One type of home equity loan is the home equity line of credit, also known as HELOC.

A HELOC can be used as a line of credit instead of a one-time loan, where you get a lump sum to use and pay back. You can use it much like a credit card, borrowing as much or as little as you like up to the credit limit. HELOC loans usually offer variable interest rates. 

How Does a HELOC Work?

A HELOC loan is based on your home equity, or the portion of the value of your home that you have paid off (don’t owe as part of your mortgage.) Someone with a high-value home and most of their mortgage paid off may have more equity available than someone with a modest home and very little of their mortgage paid off.

This equity amount helps determine how large of a HELOC you qualify for. When approved, the bank gives you access to the entire credit line, and you can choose to use some or all of it through an online transfer, a special debit card, or even checks (in some cases.) As you borrow, your balance owed grows, and your monthly payment amounts will increase. This works very much like a credit card.

Interest is added to the amount that gets repaid, just like any other loan or credit card. Keep in mind that variable rates will also determine how much your monthly payments will be since they can fluctuate with market conditions.

You can only borrow during the draw period, usually a set number of years, where you can take what you need from the loan – up to your credit limit – and payments may only go toward interest. After the draw period, your larger payments (principal plus interest) go into effect for the next set number of years or until your loan is repaid in full.

HELOC Requirements

A HELOC is a credit account, so you’ll need to have suitable credit, including a healthy credit score and a debt-to-income ratio that shows you can repay the loan responsibly. Your home must have some equity, as well. Lenders need to see that you owe less than what the home’s worth.

The lender qualifications for a HELOC are similar to that of a traditional mortgage.

Pros and Cons of Home Equity Lines of Credit


The benefits of taking out a HELOC include the following:

  • You don’t have to use all of the credit offered to you.
  • During the draw period, you may only have to pay interest, which results in smaller payments.
  • The money is available to you as you need it during the draw period, making it a flexible funding option.
  • Repayment of a HELOC may help you build credit.


HELOCs have their drawbacks, including the following:

  • Your home is the collateral for the loan, putting it at risk of foreclosure if you can’t make the monthly payments.
  • The cost of appraisals, title services, and attorney fees can really add up
  • Variable rates mean that an affordable monthly payment can now go up over time
  • Not all HELOCs can be repaid early without penalty fees

How To Get a Home Equity Line of Credit

If you’ve purchased your home with a mortgage, you’ve already gone through much of what it’s like to get a HELOC.

You’ll need to meet with a bank, compare rates and offers, and get your house appraised to demonstrate its value. If you haven’t checked your credit in a while, this may be a good opportunity to see that you’re in good financial shape to be approved. There will also be an underwriting process and a formal “closing” on your loan, which includes signing paperwork and possibly paying closing costs.

Who Should Consider a Home Equity Line of Credit

Because a HELOC uses your home as collateral, it may not be a good idea for someone who doesn't have a steady financial situation or isn't confident they can repay the loans on time. Not paying can put your home at risk of being repossessed; it's like failing to pay your original mortgage.

If you are in good financial shape and want the liquidity a HELOC offers, the loan proceeds can be used for many things. Home repairs are a popular reason to get a HELOC, and the right improvements can boost your home's value (and, therefore, the equity.)

There could also be tax perks for taking out a HELOC; the interest portion of your payments could be tax deductible if used to substantially improve your home. (Consult the IRS or your tax professional for the full details of when this applies.)

Is HELOC Right For You?

Like any loan, a HELOC can bring the right borrower funding when they need it. From building that mother-in-law addition onto your home or using it to buy a small investment property, that additional money can help you build wealth or create that lifestyle you’ve been planning.

Perhaps the best way to assess the value is to meet with a banking representative. Centier Bank can help you calculate HELOC payments, and they are experts at helping you navigate the process. Ask about current rates to see if your home could be the solution to building tomorrow’s dreams.