How does a home equity line of credit work?

A HELOC is a flexible financing tool that uses your home as collateral. The amount you can borrow depends on your home's value, your outstanding mortgage balance, and your credit score. Most lenders allow you to borrow up to 80% to 90% of your home's value minus what you owe on your first mortgage. During the draw period, typically 10 years, you can borrow up to your credit limit, repay it, and borrow again. You make interest-only payments during this period. The interest rate is usually variable, tied to the prime rate or another index. After the draw period ends, the repayment period begins, and you can no longer draw funds. Your payments increase significantly because you are now paying down the principal. HELOCs are commonly used for home improvements, debt consolidation, education expenses, or major purchases. Because your home secures the loan, failure to repay could result in foreclosure. A home equity loan is a different product that gives you a lump sum at a fixed rate.