What is a HELOC? A revolving credit line secured by the home and recorded as a second deed of trust: draw for about ten years, then repay the balance over about twenty.
A home equity line of credit is a revolving line secured by the house, recorded in Nevada as a second deed of trust behind the purchase loan. It is shaped like a credit card and carries the consequences of a mortgage: there is a limit, the borrower draws what they want when they want it, interest is charged on the drawn balance only, and repaid amounts become available again. The limit comes from a combined loan-to-value cap, so the first mortgage balance plus the line has to stay under a share of the home's value, commonly 80 to 90 percent.
It has two lives. The draw period, commonly ten years, allows interest-only payments on whatever is drawn. The repayment period that follows, commonly twenty years, closes the line to further draws and amortizes the balance in principal and interest. The rate is variable, quoted as the prime rate plus a margin, so the payment moves when prime moves. Closing costs are often low or waived, in exchange for an early-closure fee if the line is shut within the first two or three years. On a primary residence the line carries the three-business-day right of rescission, so the money is not available until that window closes.
The payment change at the end of the draw is what to look at before opening one. A $60,000 balance at 8.5 percent costs $425 a month interest-only; amortized over a twenty-year repayment period the same balance is about $521, and where the repayment period is ten years it is about $744. Nothing about the balance moved, only the obligation to retire it. A home equity loan is the fixed-rate cousin, drawn once as a lump sum and amortized from the first payment, and a cash-out refinance replaces the first mortgage entirely, which matters most when the first mortgage carries a rate below what a new one would.
A worked example
A home worth $450,000 with a $250,000 first mortgage, under an 85 percent combined loan-to-value cap, supports a line of up to about $132,500. Draw $60,000 of it at 8.5 percent and the interest-only payment during the draw period is $425 a month. When the ten-year draw ends, the same $60,000 amortized over a twenty-year repayment period is about $521 a month.
Amortize a balance over a repayment period
Questions people ask
What is the difference between a HELOC and a home equity loan?
A HELOC is a revolving line at a variable rate: draw, repay, draw again. A home equity loan is a single lump sum at a fixed rate, amortized from the first payment. Both are second liens on the same home; what differs is the shape of the borrowing.
Do you pay closing costs on a HELOC?
Often little or nothing up front, because lenders commonly waive them. The trade is an early-closure fee that recovers those costs if the line is shut within the first two or three years, and it sits in the credit agreement rather than the marketing.