Personal Finance

Q&A: What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is a line of credit (money you can borrow) that is financed through equity (ownership) someone has in their home. The interest rates associated with a HELOC are usually a bit higher than mortgage rates, but MUCH lower than credit card rates.

Pro Tip: If someone has a substantial amount of credit card or high-interest debt while also having substantial equity (or ownership) in their home, a HELOC can be a great way to shift that high-interest debt into a lower interest rate.

Real-life Application: Person A has a $100,000 mortgage on their $200,000 home and they have $100,000 of equity in the home. They also have $20,000 of credit card debt that has an APR of 20%. After speaking with their financial advisor, Person A decides to pay off their credit card debt with a HELOC that has an interest rate of 5%. They now have the same debt of $20,000, except the annual interest on it is 5% instead of 20%. That’s a savings of 15% annually, or about $3,000 on the balance of $20,000.

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