What is a HELOC (Home Equity Line of Credit)?
A HELOC (Home Equity Line of Credit) is a revolving credit line secured by the equity in your property. Unlike a home equity loan that provides a lump sum, a HELOC works like a credit card: you are approved for a maximum credit limit and can draw funds as needed during the draw period. You only pay interest on the amount currently borrowed.
HELOCs have two phases. The draw period (typically 5-10 years) allows you to borrow, repay, and re-borrow up to your limit. During this period, payments are usually interest-only on the outstanding balance. The repayment period (10-20 years) follows, during which you can no longer draw and must repay both principal and interest.
HELOC terms and rates
HELOCs typically carry variable interest rates tied to the prime rate (currently prime + 0.5% to prime + 3%). When prime is 8.5%, HELOC rates range from 9% to 11.5%. Some lenders offer introductory fixed rates or the option to lock portions of the balance at a fixed rate. The variable rate means your payment can increase significantly when interest rates rise.
Credit limits are based on available equity and the lender's CLTV limit (typically 80-85%). On a $500,000 home with $300,000 owed, an 80% CLTV limit gives you a maximum HELOC of $100,000 ($400,000 - $300,000).
HELOCs and real estate investors
HELOCs are one of the most popular funding tools for active investors. The revolving nature is ideal for wholesalers and flippers who need quick access to capital for earnest money deposits, quick-close purchases, renovation funding, and transactional funding. You draw when you need capital, repay when the deal closes, and the line is available again for the next deal.
The key advantage over hard money is cost: HELOC rates (9-12%) are typically lower than hard money (12-18%), and there are no origination points. The disadvantage is that your primary residence is at risk, draw amounts are limited to available equity, and lenders can freeze the line in a market downturn.