Home equity lines of credit
A revolving line secured by your home. Flexible, often the cheapest borrowing you have access to, and frequently a better move than a cash-out refinance.
Who it's for
Homeowners with a low rate on their first mortgage who need access to cash: renovations, a down payment on an investment property, a bridge between buying and selling, a business need, or simply a standing reserve.
How it works
A HELOC is a second lien. Your first mortgage stays exactly where it is, and the line sits behind it. You get a credit limit based on your equity, draw against it as needed, and pay interest only on what you've used. Most lines have a 10-year draw period followed by a repayment period.
What to know
Don't refinance a 3% mortgage to get cash. If your first mortgage rate is well below today's rates, a cash-out refinance replaces cheap money with expensive money on the entire balance. A HELOC leaves the cheap money alone.
HELOC versus a securities-backed line. For clients with investment accounts, the comparison isn't obvious. A HELOC has a longer term and doesn't carry margin-call risk; a securities-backed line can be faster and doesn't touch the house. I wrote about the tradeoffs for advisors, because this is one of the questions I get most from financial planners.
The rate moves. HELOCs are variable, tied to the prime rate. Budget for that, and use the line for things where flexibility is worth more than a fixed payment.
Timing. A HELOC on a home you already own is quick. A HELOC opened at the same time as a purchase (a "piggyback") is a different structure and needs to be planned into the purchase from day one.
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