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How does a HELOC work?

A HELOC works similarly to a credit card, albeit with lower interest rates.  Getty Images/iStockphoto

While many people use items like credit cards and personal loans to pay for extra expenses, homeowners have a reliable and responsible alternative to pursue: their own home. Considering that a mortgage is usually the largest bill an individual has each month it makes sense that this investment is also one of the largest ones a homeowner can tap into to help make ends meet. 

This can take many forms - a traditional refinance, a cash-out refinance and, for older homeowners, a reverse mortgage. Homeowners can also consider taking out a HELOC, or a home equity line of credit. This allows the homeowner to access a portion of the equity they have built up in their home to pay off debt, make major purchases or even complete home repairs and renovations (the latter of which may be tax deductible).

But how do HELOCs work, and is it beneficial to go this route? That's what we will explore in detail below. If you think you could benefit from taking out a HELOC then start exploring your options here now or use the table below to check your eligibility.

How does a HELOC work?

If you're contemplating a HELOC then you shouldn't worry too much about the process. They work in a simple fashion. If you've used a credit card then you're already familiar with how it operates.

With a HELOC, you'll apply for (and hopefully be approved for) a specific amount of credit based on the equity you have in your home at the time of the application. You may get approved for more than you ultimately need but you don't have to use everything you were approved for (nor should you). You will only be required to pay back the actual amount you use, not the full figure you were approved for. This will help reduce the interest you ultimately have to pay back. Lenders generally want you to have at least 15% to 20% equity in the home at the time of applying but each lender may have different requirements.

Repayment periods vary depending on the terms of your HELOC and the lender you used. They could range from 10 to 20 years although you won't be limited if you want to pay it back sooner. Interest rates on HELOCs vary but, as with other forms of credit, the best terms will usually be reserved for applicants with the highest credit score and cleanest credit history.

Plug in your zip code and credit score here to determine eligibility or simply use the table below to get started.

Are HELOCs worth it?

As with most financial products and services, the true benefit of a HELOC is relative to the individual and their personal financial situation. That said, a HELOC can be worth it for multiple reasons. Here are two major ones. 

  • Interest rates are reasonable. The average interest rate for a credit card is around 20% while personal loans hover at 11%. But a HELOC is currently approximately 7%, assuming your credit history is eligible. So, if you need a backup way to pay the bills, HELOCs provide a low-interest way to do so.
  • Interest may be tax deductible. Another way HELOCs are better than personal loans and credit cards? Interest for this type of credit may be tax-deductible, assuming it was used for IRS-approved reasons. "Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS explains. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."

Explore your HELOC options online now to determine eligibility.

The bottom line

HELOCs work similarly to credit cards and are easy to apply for. Once approved, you can use as much or as little of the credit as you'd like, knowing that you'll only pay interest on the amount you withdrew. HELOCS are also beneficial for multiple reasons, largely due to their favorable interest rates and potential tax deduction if used for appropriate purposes.

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