What is a HELOC?

Fannie Mae is looking to be able to offer HELOCs now, which might stimulate the economy. It could open up to $3 trillion of lower interest loans to homeowners, and Janet Yellen hints of swapping them for the higher interest rate loans they (government) hold right now.

It can sound very dangerous, but here is what a HELOC is: a HELOC, which stands for Home Equity Line of Credit, is a loan product offered by banks and lenders that allows you to borrow against the equity you have already built up in your home. It works similarly to a credit card in that you're approved for a credit line up to a certain amount, and you can then withdraw money as needed over a draw period, typically lasting 10 years. There is usually interest charged only on the amount you withdraw, not the entire credit line.

HELOCs are popular for financing home improvement projects, debt consolidation, or unexpected expenses. They offer flexibility compared to a traditional home equity loan, where you receive a lump sum upfront and repay it with fixed monthly payments over a set term. With a HELOC, you only make payments when you use the funds.

However, HELOCs also come with risks. Because they are based on the equity in your home, if home values fall, you could end up owing more than your home is worth. Additionally, the interest rate on a HELOC is usually variable, meaning it can fluctuate over time. This can make your monthly payments unpredictable, especially if interest rates rise.

While HELOCs can be a useful tool for accessing funds, it is important to carefully consider your financial situation and risk tolerance before applying for one.