What is a home equity line of credit?

A home equity line of credit (HELOC) is a type of revolving credit in which the borrower uses the equity of their home as collateral. This means that the amount you can borrow is based on the difference between the home's current market value and the outstanding mortgage balance. Unlike a standard second mortgage, which provides a lump sum that is repaid with fixed payments over time, a HELOC allows homeowners to draw funds as needed, up to a predetermined credit limit.

This borrowing method can provide flexibility for various financial needs—home repairs, education expenses, or other personal investments—making it a versatile financial tool. It is important to note that the funds used from a HELOC must be repaid, and the home is at risk if payments are not made.

The other options do not accurately reflect the nature of a HELOC. For example, a standard second mortgage refers to a loan taken out against a property’s equity but involves a fixed amount and not a revolving credit line. A quick loan with no collateral does not apply, as a HELOC is specifically secured against the home’s equity. Finally, while a HELOC can be used for home renovations, it is not limited to that purpose, allowing for broader use of the borrowed funds.