Picture a credit card with a really high limit. Now imagine that card uses your home for collateral. That’s pretty much a Home Equity Line of Credit (HELOC). For an initial “draw period” you can draw against and repay the loan repeatedly. When the draw period ends, you must pay back what you owe, either over a specified period or in a balloon payment.

HELOCs are usually in second lien position. The rate is typically variable monthly and based on the Prime Rate. Prime + 0% to Prime + 2% is typical. Minimum payments during the draw period are usually interest-only but may be a percent of the outstanding balance. A few offer the option to lock in one or more fixed-rate amortizing loans under the umbrella of the HELOC.

Although most often a HELOC is used to borrow against the equity in a home you already own (usually to fund a big-ticket item such as home improvements or college), we can set up a HELOC as a part of a purchase transaction. Commonly this is to avoid mortgage insurance or to keep your first mortgage below the jumbo loan limit. A HELOC can also help fund the transition from one home to another.