What Is A HELOC Loan?

A HELOC, or Home Equity Line of Credit is a loan that’s set up as a line of credit, can be drawn from up to a certain dollar amount, has a “draw period” during which you use it like a checking account (usually 10 years), followed by a repayment period (usually 10-20 years). HELOCs use simple interest, calculated daily, as opposed to amortized interest, calculated monthly.
Now it gets interesting. Many HELOCs are a second-lien loan based on the amount of equity that you already have in your home.

Or, they can be first-lien loans … issued for 90-95% of your home’s value. Using a HELOC to pay down your mortgage in full, you may be able to reduce the time it takes to pay off your home. This could be an option for you if you have positive cash flow.

Some HELOCs require full repayment as soon as the draw period ends. This is called a Balloon payment. You can avoid this by refinancing before the draw period is over. Simpler still, don’t get a HELOC with a Balloon payment. Either way, always deposit your entire paycheck in the HELOC. You’ll pay less interest, and could pay down the HELOC before the draw period ends.

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