How does a HELOC work?

HELOCs can be useful financial tools, but it’s important to understand exactly what you’re signing up for. Basically, a HELOC is an advance that lets you borrow against the equity in your home for a set time before entering a repayment period.

During the borrowing period, you can borrow (draw) up to the maximum amount of the line of credit, pay it down, and then borrow it again. Monthly interest on the outstanding balance is due during the draw period. Draw periods vary, but typically run between five and 10 years. 

During the repayment period, you can no longer draw. You will need to make monthly payments to pay off the principal amount you borrowed, plus interest. The length of repayment periods varies, as do associated rates and fees.

Like credit cards, HELOCs allow you to continuously borrow up to a certain amount against your line of credit instead of taking out a lump sum like you would with other types of loans. Unlike a credit card, you cannot pay off the balance and pay no interest as interest starts on the amount you use as soon as you draw funds during the draw period. But a HELOC is secured by the collateral of your home and usually has a lower rate than credit cards, which is why HELOCs are generally used to borrow larger amounts.

“As with any lending decision, it’s important to do your research and talk to your banker before making any final determinations,” said Kim Quarrie, consumer lending manager at Wheaton Bank and Trust. “Make sure you have an understanding of the terms, your financial outlook, and what your goals are.” The right option for you is going to depend on your individual situation, and you should be certain your banking partner is working to find the lending option that best fits your needs, lifestyle, and long-term plan.

With that in mind, here are our experts’ top do’s and don’ts concerning HELOCs. 

Do’s: How to utilize HELOCs

HELOCs are most beneficial for their flexibility.

“A HELOC is like a giant credit card in that if I apply for $100,000, I then have $100,000 available to me,” Ed Houlihan, senior vice president of consumer lending at Beverly Bank and Trust, explained. “Because I’m only paying interest on what I’m using, I can use all the funds, none of the funds, or some of the funds. Sure, there’s an annual fee attached, but I have the security of having those funds available at my disposal.” Access to the funds can be as simple as writing a check or electronically transferring them to a checking account. 

For homeowners seeking to capitalize on their home’s equity for more tangible reasons, Quarrie says you are not alone. “The most common instance in which we recommend HELOCs is when our customers come to us seeking financing for home improvements,” she said. 

When mortgage rates are high, HELOCs can be a smarter way to access home improvement funds since refinancing rates are usually unfavorable. In addition, using HELOC money for home improvements may make the interest you pay on a HELOC tax deductible, but please consult with your accountant to be certain of that. 

Other common uses for HELOCs that Wintrust experts point customers toward are education expenses for themselves or their children, or as a supplement to their retirement plan to ensure ongoing access to capital. Others are preemptive borrowers, planning for emergencies or the unexpected, or investment-oriented customers who use a HELOC to purchase investment property or start a business

“As part of their long-term strategies, I often tell customers HELOCs are something to think about today as an option to pay for something they may not need immediately,” Houlihan said. “Having one of these in your back pocket as an alternative source of funds for something unexpected or that you’re planning for in the future, the money is available immediately because they already prepared on the front end.”

Don’ts: What to avoid with HELOCs

Remember, when you take out a HELOC, you’re borrowing against the equity in your home, which means you’re using your home as collateral. If you don’t repay, you risk foreclosure. 

To that end, our bankers say that everyday expenses are not the ideal use of HELOC funds, and advise customers to use them instead as part of a bigger financial strategy. 

Along the same lines, customers come to our team seeking HELOCs to pay off high-interest debt, such as consolidating credit cards. While this can be a good use of HELOC funds, we advise borrowers not to open new credit cards during repayment for risk of falling into the same traps and racking charges right back up.

Your partner for HELOCs, and more

With our experienced local team, we can provide access to a wide range of high-value services and personalized solutions for your banking, credit, and mortgage needs, all under one roof — including those that help you capitalize on your home’s growing value. 

Find out more about our home equity line of credit options here.