HELOC Loan

What Is a HELOC Loan? Understanding the Home Equity Line of Credit

For homeowners looking to tap into the equity they've built in their property, a HELOC — or Home Equity Line of Credit — can be a powerful and flexible financial tool. Whether you're planning a renovation, consolidating debt, or covering unexpected expenses, a HELOC offers access to funds when you need them, with terms that differ from traditional home loans.

How Does a HELOC Work?

A HELOC is a revolving line of credit secured by the equity in your home. Unlike a lump-sum home equity loan, a HELOC allows you to borrow as needed, up to a pre-approved credit limit, similar to how a credit card works.

Key features include:

Draw period: Typically 5 to 10 years, during which you can borrow funds as needed and make interest-only payments.
Repayment period: After the draw period ends, you'll enter the repayment phase, where both principal and interest are due — usually over 10 to 20 years.
Variable interest rate: Most HELOCs come with variable rates, meaning your payments could increase over time depending on market conditions.

How Much Can You Borrow?

The amount you can access through a HELOC is based on your loan-to-value ratio (LTV) — the percentage of your home’s value that you’re borrowing against. Lenders typically allow you to borrow up to 85% of your home’s appraised value, minus the amount you still owe on your first mortgage.

Here’s a simplified example:

Appraised home value: $400,000
85% of value: $340,000
Current mortgage balance: $250,000
HELOC limit: $90,000

This formula ensures you maintain a buffer of equity and limits the lender’s risk.

Pros and Cons of a HELOC

Benefits:

Flexibility: Borrow only what you need, when you need it
Lower initial rates than many personal loans or credit cards
Interest may be tax-deductible if used for home improvements (consult your tax advisor)

Risks:

Variable interest rates can increase over time
Your home is collateral — missed payments can lead to foreclosure
Payment shock when the interest-only period ends and principal payments begin

Is a HELOC Right for You?

If you've built up substantial equity and need flexible access to cash, a HELOC may be a great option. However, it's essential to fully understand the terms, risks, and repayment responsibilities before proceeding.

At Sterling Financial Services, we can help you explore whether a HELOC aligns with your financial goals. We'll walk you through the application process, help assess your eligibility, and ensure you're equipped to make a confident, informed decision.