What Is a HELOC?

Short answer

A HELOC (home equity line of credit) is a revolving credit line secured by your home, usually as a second mortgage behind your existing first. You draw what you need during a draw period (commonly 10 years), pay interest only on what you use, and then repay principal and interest over a repayment period (commonly 20 years). Rates are variable in most HELOCs. In Florida, the line amount recorded is subject to doc stamps and intangible tax.

Definition

A HELOC turns home equity into a flexible credit line, like a credit card secured by real estate. The lender sets a maximum combined loan-to-value (CLTV) for the first mortgage plus the line, and the line can be drawn, repaid and redrawn during the draw period.

Worked example

A homeowner in Miami Springs has a house worth $650,000 and a first mortgage of $280,000 at a low rate she wants to keep. The HELOC lender allows 85% CLTV: $650,000 x 0.85 = $552,500 minus $280,000 = $272,500 maximum line. She opens a $150,000 HELOC to fund a $60,000 condo special assessment on a rental she owns and keep the rest available. Florida taxes at recording: doc stamps $150,000 x 0.0035 = $525 and intangible tax $150,000 x 0.002 = $300. Drawing $60,000 at an illustrative 8.5% variable rate, interest-only: $60,000 x 0.085 / 12 = $425 a month. Compared with a cash-out refinance of the whole $280,000 at today's rates, she saves on both rate and Florida taxes.

How a HELOC works

• Draw period: typically 10 years; borrow, repay and redraw; minimum payments are often interest-only.
• Repayment period: typically 20 years; no new draws; payments cover principal and interest.
• Rate: usually variable, tied to the prime rate plus a margin; some lenders offer fixed-rate locks on draws.
• Costs: appraisal or valuation, Florida doc stamps and intangible tax on the line amount, recording; some lenders charge an annual fee.
• Qualifying: credit, income and DTI are reviewed like a mortgage, with the HELOC payment counted at the full line.

HELOC vs cash-out vs fixed second

Keep your low first mortgage and add a HELOC when you want flexibility and may repay quickly. Choose a fixed second mortgage when you want a set payment on a lump sum. Choose a cash-out refinance when your current rate is high anyway or you want one payment. Rates vary daily; call for today's pricing. See HELOC loans.

In South Florida

HELOCs have become the go-to tool for South Florida owners who locked in low first-mortgage rates and now need cash for condo assessments, roofs and impact windows (which lower insurance), a down payment on an investment property, or a child's first home. Florida specifics: doc stamps and intangible tax are due on the full line amount at recording, even if you draw little, so size the line to what you expect to use; some lenders pay these as a promotion. HELOCs on investment properties and condos are available from fewer lenders at lower CLTVs. Variable rates mean your payment can rise; a fixed second mortgage is the alternative.