HELOCs Explained – What I Learned Helping My Parents Get One
My parents needed to renovate their kitchen last year. Like, really needed to – we are talking 40-year-old cabinets and an oven that caught fire once. They did not want to drain their savings and they did not want a regular loan. So we looked into a HELOC.
I ended up learning way more about home equity lines of credit than I ever expected. Here is the useful stuff.
What a HELOC Actually Is
Think of it like a credit card that uses your house as collateral. You have a credit limit based on how much equity you have in your home, and you can borrow from it when you need to. Pay it back, borrow again. Pretty flexible.
There are two phases. First is the draw period, usually 5-10 years. During this time you can borrow money and typically only pay interest on what you have borrowed. Then comes the repayment period, another 10-20 years where you pay back both principal and interest, and you can not borrow more.
My parents got a 10-year draw period with a 20-year repayment. Seemed pretty standard.
The Equity Math
Here is how they figure out how much you can borrow. Take your home value, multiply by 85% (or sometimes 80%), subtract what you owe on your mortgage. That is roughly your credit limit.
My parents home is worth around $400,000 and they owe about $120,000 on the mortgage. So: $400,000 x 85% = $340,000, minus $120,000 = $220,000 available. They did not need anywhere near that much for the kitchen, but it was nice to know they had options.
Fixed vs Variable Rates – This Matters
Most HELOCs have variable rates tied to the prime rate. When interest rates go up (like they have been lately), your rate goes up too. This can really change your monthly payment.
Some lenders offer fixed-rate options or let you lock in portions of your balance at a fixed rate. We pushed for that because my parents are on a fixed income and need predictable payments. Worth asking about.
The Lenders We Actually Talked To
We shopped around quite a bit. Here is what we found:
Their current bank (Chase) – Decent rates, no closing costs, easy process since they already had the relationship. Ended up being the winner for convenience.
Bank of America – Similar rates, offered a rate discount for autopay. Nice online tools.
A local credit union – Actually had the lowest rate by a bit. But the process was slower and they wanted more paperwork. If we had not been in a hurry, might have gone this route.
An online lender (Figure) – Really fast, like approval in minutes. Decent rates. But we were a little nervous about a fully online process for something this big. Might be good for people more comfortable with that.
The Fees Nobody Tells You About
This part annoyed me. Some lenders advertise no closing costs but then have other fees. Look out for:
- Application fees
- Appraisal fees (usually $300-600)
- Annual maintenance fees (some charge $50-100/year)
- Early closure penalties (if you close the line too soon)
- Inactivity fees (if you do not use the line)
We found one lender that had no closing costs but a $75 annual fee. Another had no annual fee but wanted $400 upfront. You have to do the math for your situation.
What We Used The Money For
Kitchen renovation mostly. New cabinets, countertops, appliances. Came out to around $35,000.
The nice thing about a HELOC is you do not take all the money at once. They drew what they needed when they needed it – some for the contractor deposit, more when materials were purchased, the rest when the work was done. Only paid interest on what was actually borrowed.
Some people use HELOCs for other stuff too – home repairs, paying off high-interest debt (be careful with this), education expenses. The interest is sometimes tax-deductible if you use it for home improvements, but check with a tax person on that.
The Scary Part – Your House Is Collateral
I do not want to skip over this because it is important. A HELOC uses your house as security. If you do not pay, they can foreclose. This is not like missing a credit card payment.
My parents are responsible and have stable income, so I was not worried. But if your financial situation is shaky, think hard about whether borrowing against your house is smart. The interest rates are lower than other options BECAUSE your house is on the line.
Tips From Our Experience
Get the HELOC before you need it. My parents actually opened the line about 6 months before they started the kitchen project. No cost to have it sitting there (as long as there is no inactivity fee), and it was ready when they needed it. Trying to get approved when you are in a rush is stressful.
Shop at least three lenders. The rate difference between best and worst was almost a full percentage point. On a $35,000 balance, that is real money.
Ask about rate caps. If you get a variable rate, there should be a cap on how high it can go. Make sure you could afford the payment at the maximum rate.
Understand the repayment phase. When the draw period ends and you start paying principal plus interest, the payment can jump significantly. We made sure my parents understood what their payment would become.
Do not treat it like free money. It is still debt. It still needs to be paid back. The easy access can be dangerous if you are not disciplined.
Would I Recommend a HELOC?
For the right situation, absolutely. My parents needed money for a clear purpose, had equity to tap, had stable income to make payments, and got a good rate. The kitchen looks great and they are paying it off on schedule.
But it is not for everyone. If you are borrowing because you are struggling, or you do not have a clear plan for the money, or your income is uncertain – a HELOC might make things worse, not better.
Think of it as a useful tool, not a solution to financial problems. Used wisely, it can be really helpful. Used carelessly, it can put your home at risk.
That is everything I know about HELOCs. Hopefully it helps you figure out if one makes sense for you.
