What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is a line of credit that is secured against the equity in a borrower's home. This means that the amount of credit available to the borrower is determined by the difference between the current market value of the home and the outstanding mortgage balance. As homeowners pay down their mortgage or if their property's value increases, their equity grows, providing them with a potential source of borrowing.

This type of financing allows homeowners to access funds as needed, often for significant expenses like home improvements, education costs, or debt consolidation. The credit line functions similarly to a credit card, where the borrower can draw on the available credit and pay it back over time. The interest rates on HELOCs are usually variable and may be lower than those for unsecured loans, making them an attractive option for those who have accumulated substantial equity in their homes.

In contrast, the other choices do not accurately describe a HELOC. For instance, a loan to purchase a new home without collateral would suggest unsecured lending, which does not relate to home equity. A mortgage for second homes pertains specifically to financing additional properties, while a type of consumer loan for personal use typically refers to unsecured loans that do not require collateral or involve home equity.