How Does a HELOC Work?

Transcript

You've built equity in your home. Borrowing against it can make sense — but there's a catch. Here it is, fast. A HELOC is a credit card secured by your house. You borrow, repay, and borrow again — usually at a rate that moves with the market. It runs in two phases. A draw period, about ten years, when you can borrow. Then a repayment period, about twenty. Say you borrow fifty thousand dollars at eight and a half percent. During the draw, interest only runs about three hundred fifty a month. When repayment starts, it jumps to around four hundred thirty, as you pay down principal. On that same fifty thousand — here's the trap. Ten years of interest-only costs about forty-two thousand, and you still owe the full fifty. All in, that's roughly ninety-six thousand in interest. It's not your only option. A home-equity loan gives a lump sum at a usually-fixed rate. A cash-out refinance rolls it into a new mortgage. Before you sign, check two things. The rate can rise, so model a higher one. And plan for the payment jump. See how it plays out on your own numbers at worthune.com. Worthune turns money decisions into math you can see and re-run — every assumption named. A friend who's good at math. One note: this is educational only, not financial advice. The figures are illustrative. Your situation is unique — talk to a professional before you act.

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