The second lineA plain-English briefing on HELOCs.
Keep the mortgage you have. Add a line beside it.
A home equity line of credit, or HELOC, is a credit line that uses your home’s equity as backing. It’s a separate loan that sits behind your first mortgage. Your first mortgage, its rate and its payment don’t change, even if it’s an FHA loan.
Two lines, one house.
Your first mortgage keeps running exactly as it does now. The HELOC is its own line underneath.
Your first mortgage.Same rate, same payment, start to finish.
Your home is the collateral for both lines.
Your HELOC opens.A limit is set, based on your equity, credit and income.
Variable rate.When rates move, the payment can move.
1 Draw period.Borrow what you need, pay it down, borrow again. Often several years. Payments may be interest-only on what you’ve used.
2 Repayment period.No new draws. You pay back principal and interest, so payments are often higher.
When a HELOC tends to fit
- You like your current rate and don’t want to give it up.
- You need money in pieces over time: a project paid in stages, or a cushion you may never touch.
- You’d rather pay interest only on what you actually use.
When something else may fit better
- You want one fixed payment for a set amount. A home equity loan is a fixed-rate second mortgage paid out once. It also leaves your first mortgage alone, and adds a second payment.
- You want a new rate or term anyway, or one payment for everything. A cash-out refinance replaces your first mortgage with a bigger one.
You give up your current rate, closing costs apply, and a longer term can mean more total interest. Your home is the collateral.
- You’re paying mortgage insurance. A HELOC doesn’t remove it. Refinancing to a loan without mortgage insurance might, if your equity and the numbers support it, or keeping things as they are might still come out ahead.
How much line could there be?
Lenders often cap the total of your first mortgage and the HELOC together at around 80 to 85% of the home’s value.
Example only: a $400,000 home with $250,000 owed might support a line of roughly $70,000 to $90,000.
Questions people ask
Will my first mortgage payment change?
No. The HELOC is a separate loan with its own payment. Your first mortgage stays exactly as it is.
Does it work if my first mortgage is FHA?
Often, yes. An FHA first mortgage can stay in place with a HELOC behind it, subject to the HELOC lender’s rules.
What happens if rates go up?
Most HELOCs have a variable rate, so the rate and payment can rise. Some lenders offer ways to fix part of the balance. Ask Erik what’s available.
What does the home have to do with it?
It’s the collateral. If payments aren’t made, the home is at risk, just like with your first mortgage.
Do I have to use it?
No. Some people open a line as a cushion and never draw on it. Fees may still apply.
See it with your numbers.
Erik can put a HELOC next to a home equity loan, a cash-out refinance and leaving things alone, so you can see the trade-offs side by side.