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 such as credit cards. A HELOC often has a lower interest rate than some other common types of loans, and the interest is usually tax-deductible.
How a HELOC 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. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. 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 (typically10 years) up to the credit limit you establish at closing. At the end of the draw period, the repayment period (typically 20 years) begins.
Qualifying for a HELOC
To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe. Also, a lender generally 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 home equity line of credit, the rate can change from month to month. The variable rate 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 U.S. Prime Rate as published in The Wall Street Journal as the index for 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 monthly bills with minimum payments that include principal and interest. Payments may change based on your balance and interest rate fluctuations, and may also change 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 cancellation or early closure fee. Bank of America HELOCs don’t have any application fees, annual fees or closing costs. An early closure fee applies with a Bank of America HELOC if you close your HELOC account within 36 months of opening it.