HELOC Guide: Using Equity Without Replacing Your Mortgage

What a HELOC is

A HELOC works more like a credit card than a standard loan. You are given a limit and borrow against it as needed during the draw period. After that comes the repayment period, when you can no longer draw and the balance is paid down.

Most HELOCs have a variable rate that moves with an index. Many allow interest-only payments during the draw period, which means the payment rises when repayment begins. A fixed-rate home equity loan is the sibling product: one lump sum, one fixed payment, also behind your first mortgage.

Who it tends to fit

• Owners with a first mortgage they want to keep as it is
• Owners with costs that come in stages or are not fully known, such as a remodel
• Owners who plan to repay the balance within a few years
• Owners who want a line available without drawing on it right away

If the first mortgage also needs to change, or the cash need is large and long term, a cash-out refinance may be the better comparison.

What to gather

• Your most recent mortgage statement
• Your homeowners insurance declarations page and property tax bill
• Your last 30 days of pay stubs and two years of W-2s, or tax returns if you are self-employed
• Two months of bank statements, every page
• A rough figure for how much you need and what it is for

Common snags

• A payment that changes. A variable rate can raise the payment, and the end of the draw period can raise it again.
• A balloon. Some lines require the remaining balance in full at maturity. Read the terms.
• Combined loan limits. The first mortgage plus the line cannot exceed a share of the home’s value, and the share depends on the program.
• Fees. Some lines carry annual fees or a fee for closing the line early.
• No repayment plan. A line is easy to draw on and slow to pay down. Decide how it gets repaid before you use it.

A HELOC on a home you live in generally comes with a right to cancel within three business days of signing. Your closing documents explain the timing.

Your next step

Put a HELOC, a fixed second loan and a cash-out refinance on one page, using the same cash amount for each. The HELOC vs cash-out comparison shows how.

When you want to talk it through, book a short phone call with Zak on Chris Lamm’s team at MortgageOne. No credit check is needed for a first call, and you can bring as many questions as you like.