What is a home equity line of credit (HELOC)?
A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans,Footnote1 such as credit cards. In addition to a HELOC often having a lower interest rate than some other common types of loans, the interest is usually tax-deductible.Footnote2
How it works
With a HELOC, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit.Like a credit card, as you repay your outstanding balance, the amount of available credit is replenished.This means you can borrow against it again if you need to, and you can borrow as little or as much as you need throughout your draw period
(which is usually 10 years), up to a credit limit established at closing. At the end of the draw period, the repayment period begins, which is typically 20 years.
To qualify for a HELOC, you need to have available Glossary Term: equity
in your home, meaning that the amount you owe on your home must be less than the value of your home. Typically, you can borrow up to 85% of the value of your home minus the amount you owe. A lender generally also looks at your credit score and history, employment history, monthly income, and monthly debts, just as when you first got your mortgage.
Variable interest rate
When you have a variable interest rate on your HELOC, the rate can change from month to month. The variable rate on your home equity line of credit is calculated from both an index and a margin.
An index is a financial indicator used by banks to set rates on many consumer loan products. Most banks, including Bank of America, use the Wall Street Journal prime rate as the index for our HELOCs. The index, and consequently the HELOC interest rate, can move up or down.
The other component of a variable interest rate is a margin, which is added to the index. The margin is constant throughout the life of the line of credit .
As you withdraw money from your HELOC, you’ll receive a monthly bill with variable-rate monthly minimum payments that include principal and interest. Payments may change based on your balance and interest rate fluctuations, or if you make additional principal payments. Making additional principal payments when you can will help you save on the interest you’re charged and help you reduce your overall debt more quickly.
Fixed interest rate option
Some lenders, including Bank of America, offer an option that allows you to convert a portion of the outstanding variable-rate balance on your HELOC to a fixed rate. Payments you make on a balance at a fixed interest rate are predictable and stable and can protect you from rising interest rates. Learn more about Bank of America’s Fixed-Rate Loan Option.
Ask your lender if there are any fees associated with your HELOC. There may be up-front fees, such as an application fee, an annual fee and a cancelation/early closure fee. Bank of America HELOCs don’t have any application fees, annual fees or closing costs.Footnote3 An early closure fee applies with a Bank of America HELOC if you close your HELOC account within 36 months of opening it.