What Is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit (HELOC) is a popular and affordable way to borrow cash as you need it, using your home’s value as security. HELOCs are often used to fund home renovations or debt consolidation, or as a backstop to cover unexpected expenses.

HELOCs are available from many banks and credit unions, but local lenders like Scenic Community Credit Union often offer HELOCs, along with many other home loan options, with lower rates and fewer fees than most commercial banks.

Read on for a closer look at what HELOCs are, how they work, what they can be used for, and how to qualify for and use one. 

Understanding HELOCs

A home equity line of credit is a revolving line of credit secured by your home’s equity. Unlike a regular home equity loan, which provides a lump sum, a HELOC lets you borrow as needed, up to your approved limit.

In essence, a HELOC works like a credit card. You can withdraw funds as needed during the draw period, repay what you borrow, and borrow again. This flexibility makes HELOCs a useful tool for ongoing expenses or projects with unpredictable costs.

And, because it is secured against your home, rates are typically lower than those for credit cards or personal loans.

How Does a Home Equity Line of Credit Work?

A HELOC allows you to borrow against your home’s equity in two phases: the draw period and the repayment period.

During the draw period—typically 5 to 10 years—you can withdraw funds as needed and make interest-only payments. Once the repayment period begins, you can no longer borrow, and your payments include both principal and interest. The repayment period can last up to 20 years.

HELOCs usually have variable interest rates, which means your payment amount can change over time. Some lenders offer fixed-rate options, giving you more predictable payments.

Common Uses for a HELOC

What is a HELOC commonly used for? Typical uses include: 

• Home renovations and improvements: They’re ideal for ongoing projects that require regular injections of cash.

• Debt consolidation: With lower rates than most credit cards, a HELOC can be a good way to borrow money to consolidate and pay down short-term debt.

• Emergency expenses: Having a HELOC in place is a great way to plan for unforeseen or emergency expenses rather than using your credit card.

• Education costs: Allows your student to have cash on tap to cover college expenses as they arise.

Pros and Cons of a HELOC

It’s important to understand the relative pros and cons of using a HELOC as compared to other forms of borrowing. While there are many benefits, there are also some potential drawbacks to the irresponsible use of your credit.

How to Qualify for a HELOC

Lenders look at several factors to determine if you qualify for a HELOC, including your credit score, home equity, and debt-to-income (DTI) ratio.

Most lenders require a credit score of at least 620, though higher scores may get better rates. You’ll also need enough home equity — typically at least 15-20% — to borrow against.

A lower DTI ratio (the total amount of monthly debt you owe versus what you earn) improves your chances of approval and may help you secure a better rate. Verification of your income is required to ensure you can manage payments. 

HELOCs vs. Other Loan Options

How do HELOCs work compared to other types of loans? The following chart takes a look at regular home equity loans vs. lines of credit and other loan options.

Tips for Managing a HELOC Responsibly

While a HELOC can provide crucial funding as you need it, it’s easy to overborrow, saddling you with expensive payments for years to come. Follow these tips to ensure you use your HELOC responsibly:

1. Borrow only what you need: With minimal or interest-only repayments during the draw period, it’s easy to get in over your head.

2. Make consistent payments to avoid financial strain: Try to repay money consistently. Ideally, you should pay off your HELOC at the end of the draw period. 

3. Monitor interest rate changes and repayment terms: Keep track of what rate you are paying. Read the terms of your HELOC carefully to understand how repayments work.

4. Have a repayment plan before borrowing: Don't treat your HELOC as unlimited cash. Plan how you’ll repay what you borrow, especially before the repayment period begins. 

5. Avoid using a HELOC for non-essential spending: A HELOC is best used for investments that add value, like home improvements. Using it for vacations or daily expenses can lead to long-term financial strain.

Why Get a HELOC from Scenic Community Credit Union? 

At Scenic Community Credit Union, we know financial peace comes from knowing you have the reserves to cover necessary upgrades or renovations to your home, to consolidate high-interest debt, and to pay for unexpected expenses when they arise.

That’s why we offer our members flexible, convenient lines of credit, secured by your home, with minimal fees and lower interest rates. Our home equity lines of credit feature:

• Lines up to $250,000 ($15,000 minimum line)

• 5-year draw period, with a 15-year repayment term

• Loan-to-value up to 90% of your home's appraised value 

• No annual fee, no application fee, and no prepayment penalty

Best of all, every Scenic Community Credit Union HELOC comes with our trademark personalized service and quick, local approvals and closings by our experienced staff. 

Interested in using your home equity to help you manage expenses and invest in your future? 

Contact Us To Get Started