HELOC

A home equity line of credit, HELOC, is a revolving credit line secured by the equity in your home. You are approved for a maximum, draw what you need during the draw period, typically ten years, pay interest on the drawn balance, and then enter the repayment period, often twenty years, where principal and interest are both due. The rate is variable: the prime rate plus a margin, repriced monthly with the Fed.

The house is the collateral, which is why the rate is the cheapest credit most homeowners will ever be offered and why defaulting risks the home itself. Second liens sit behind the first mortgage in foreclosure, which makes them riskier for the lender and pricier for the borrower than the first lien. The variable rate is the other half of the risk.

The structure runs in two phases. During the draw period, typically ten years, you draw against the limit and pay interest on the drawn balance; a $50,000 draw at 8.5% costs about $354 a month of interest-only. When the repayment period begins, often twenty years, the same balance amortizes: principal and interest of roughly $434 a month at 8.5% over twenty years, and the payment jumps the month the phase turns.

The rate is the variable part. HELOCs price at the prime rate plus a margin set by the lien position and the credit tier: a high-equity line prices at prime plus 0.5%, a second lien with thin equity at prime plus 2%. The prime rate moved from 3.25% in early 2022 to 8.5% by late 2023, so a line that cost $156 a month of interest on a $50,000 draw in 2021 cost $375 by 2023: the Fed's hikes, passed through monthly, more than doubled the carrying cost of every outstanding line.

The credit limit is the other arithmetic. Lenders cap combined loan-to-value near 80%: a $500,000 home with a $320,000 mortgage allows total secured borrowing near $400,000, so an $80,000 line is the maximum. Drawing to the maximum is drawing to the cap, and the 2006 wave drew to the cap, which is the cautionary version of the same arithmetic.

The HELOC is the cheapest secured credit most homeowners can access, and it is the right tool for renovations, bridge costs, and genuine emergencies. It is the wrong tool for consumption, because the collateral is the house and the rate is variable. The 2022-2023 rate cycle repriced every outstanding line monthly, and the 2006 cycle showed what drawing to the cap at the top of a market costs.

I watched a colleague named Brent (yes, that Brent) open a line for a truck, draw $40,000, and pay the interest-only minimum for three years. The prime rate doubled, his interest bill went from $125 to $300 a month, and the repayment phase turned with the full balance waiting. The truck had depreciated; the lien had not.

The highest-leverage thing most Americans can do is keep a HELOC open for emergencies but undrawn, budget for the repayment phase before drawing, and price the variable rate against the Fed's trajectory. Estimate the payments with the home equity HELOC calculator and the rate context in the interest rate entry, and the equity underneath in the home equity entry.