Definition
A revolving line of credit secured by your home, which you can draw on as needed up to a limit, usually at a variable rate.
What it means
A HELOC lets you borrow against your home equity like a credit card with a much higher limit. During the draw period, often 10 years, you can borrow and repay repeatedly, and some plans require interest-only payments. Then a repayment period begins, when you can no longer borrow and must pay back principal and interest, which can cause a big jump in payments. Most HELOCs have variable rates tied to an index such as the prime rate. Federal rules require lenders to give HELOC disclosures, and for a line on your main home you generally have three business days to cancel after opening. Because your home secures the line, falling behind can lead to foreclosure. Interest may be deductible only if the money buys, builds or substantially improves the home.
Example
Drawing $40,000 on a HELOC at 8.5% with interest-only payments costs about $283 a month. If the line then converts to a 20-year repayment period, the payment rises to about $347.
Illustrative numbers only. Your situation will differ.