Piece 01
Credit limit = equity × LTV cap
Most lenders go to 80-85% combined LTV. Home worth $400K with $200K mortgage = $200K equity. 85% CLTV → max $140K HELOC limit.
HELOC · equity on tap
Borrow against the house.
Carefully.
A Home Equity Line of Credit lets you borrow against your equity like a credit card. Variable rate, 10-year draw, 20-year repay. Powerful for renovation or strategic moves. Dangerous when used for lifestyle.
· How HELOCs work
Four pieces.
All matter.
Piece 02
Draw period (typically 10 years)
You can take money out as needed during this window. Pay interest-only on what you've drawn. Like a credit card you can repay and re-draw.
Piece 03
Repayment period (typically 20 years)
After the draw period closes, no more borrowing. The balance amortizes over 20 years. Payment can spike here — interest-only ends, full P&I begins.
Piece 04
Variable rate (mostly)
Tied to the prime rate. Most HELOCs are variable; some offer rate locks on portions you've drawn. Budget for rate moves.
· Watch-outs
Four traps
in HELOC pitches.
Pitfall 01
Using it for lifestyle.
HELOC for vacation, car, wedding = converting home equity into consumer debt. The collateral is your house. Walk.
Pitfall 02
Forgetting the payment shock at year 11.
Draw period ends → repayment begins → monthly payment can 2-3x. Calendar this NOW for whenever your draw period closes.
Pitfall 03
Ignoring rate variability.
Prime moves with the Fed. A 7.5% HELOC can become 9% in a year. Fixed-rate alternative: cash-out refinance (different math, different trade-offs).
Pitfall 04
Closing it 'just because.'
Open HELOC contributes to your credit profile (available credit). Closing it reduces your usable credit, can hurt utilization. Keep open even if you're not drawing.
HELOC = tool.
Use carefully or not at all.
We model HELOC vs cash-out refi vs recast for your specific situation. Often the best move isn't the obvious one.