Being a homeowner brings a wealth of opportunities. In addition to providing space for you and your family, a home can also be a source of funding for big ideas.

With a home equity line of credit, you can tap into your home’s value. Learn more about this lending product below and consider whether it’s the right choice for your plans.

What Is a Home Equity Line of Credit?

A home equity line of credit, commonly called a “HELOC,” is a revolving credit that uses your home’s equity as the borrowing limit. Whatever amount you draw from the HELOC is paid back over time.

What exactly is home equity? In its simplest terms, equity can be summed up in the following “formula”:

• [The current market value of a home] – [Any mortgages or liens placed on the property]
  

The resulting value is defined as “equity.” This value determines how much someone can borrow for a HELOC or a home equity loan.

A lender calculates a borrower's credit limit based on equity. The borrower may use the HELOC like a credit card: draw from the funds when needed and pay back the amount owed later.

There are different ways to draw from a HELOC. Depending on the lending institution, you may have several options. They include:

• Writing out checks
• An actual, physical credit card
• Direct transfers between accounts
  

HELOCs have two phases. The first is the “draw period,” during which a borrower can access the funds for a set time, usually ten years. During this period, the borrower makes payments according to terms set by the lender. 

When the draw period ends, the HELOC enters the “repayment period.” This is when the borrower must pay back the outstanding balance. Once a borrower enters the repayment period, they can no longer draw from the HELOC.

A home equity line of credit presents many opportunities to borrowers. Some uses of a HELOC include:

• Paying for large-scale home remodeling or renovation projects
• A final safety net to supplement an emergency fund
• Debt consolidation
  

Advantages of a HELOC

A home equity line of credit has distinct advantages from other lending products. They include:

• Lower interest rates and fees: A HELOC uses the home as collateral, making it a secured lending product. Because of this, lenders are more willing to offer more competitive rates than unsecured lending vehicles. This also means that a HELOC borrower tends to pay less in fees compared to a home equity loan.

   

• Flexibility: HELOCs serve as a funding pool and function like credit cards. A borrower can access the funds for a set period instead of receiving a single lump sum like a loan. It provides the flexibility to borrow only when needed and repay that balance during repayment.

   

• Higher lending limits: HELOCs tend to have higher borrowing limits than other lending products. As such, they are typically used for big purchases like home improvement projects and home repairs. A HELOC might be right for you if you’re considering any significant investments in the future.

   

• Possible tax advantages: Repayment of a HELOC may qualify you for some tax deductions when filing your next return. For instance, for tax years 2018 through 2025, the interest paid from HELOC funds used for a property's purchase, construction, or substantial improvement might be classified as “home acquisition debt” and may be tax-deductible. Visit the IRS website to learn more about these deductions.
  

Considerations Before Applying for a HELOC

A HELOC is a powerful lending tool. However, you need to consider some things before signing up for one.

First, a HELOC uses your home as collateral. Lenders can put a lien on your house. They can take your house if you fail to repay your debt.

Second, HELOCs have variable interest rates. Most loans that disburse a set amount also lock in an interest rate. The interest rate of a HELOC is variable, much like a credit card. It is affected by several economic factors and can go up or down. This can cause your monthly payments to change significantly during both the draw and repayment periods.

Third, some lenders may impose borrowing minimums. This means the lender might require you to take out a certain amount every time you draw from the HELOC or you may be required to have a minimum outstanding balance on the account. As a result, you may end up paying interest on money you may not have used. Verify with your lender if their HELOC has borrowing minimums.

A home equity line of credit has its fair share of advantages and considerations. It’s helpful if you plan to borrow over a long time. Working with a trusted lending institution can help you determine if a HELOC suits your needs or if another option would be more sensible for your situation.

Partnering with a trusted lender can unlock your home’s potential. First Florida lending products include a home equity line of credit and second mortgage home equity loans, providing robust options for realizing your goals.