Can You Get Cash From a HELOC and How Does It Work?

A Home Equity Line of Credit (HELOC) provides a flexible way to access funds based on the equity built up in your home. It functions as a revolving line of credit, allowing you to borrow, repay, and re-borrow money as needed, up to an approved limit. Yes, you can get cash from a HELOC, making it a potential resource for various financial needs.

How a HELOC Functions as a Cash Source

A HELOC operates like a flexible credit account, similar to a credit card, but it is secured by your home’s equity. This means your home serves as collateral, which can lead to more favorable interest rates compared to unsecured loans. Lenders typically allow borrowing up to a percentage of your home’s appraised value, often around 80% to 85%, minus any outstanding mortgage balance.

This financial tool is not a lump-sum loan; instead, it establishes a credit limit from which you can draw funds over a specific “draw period.” This period commonly ranges from 5 to 10 years, during which you can access money as needed. Interest is only charged on the amount you actually borrow, not on the entire approved credit line. As you repay the borrowed amount, the available credit replenishes, allowing you to draw funds again within the draw period.

Methods for Accessing Funds

Once a HELOC is established, there are several ways to access the available cash. Many lenders provide HELOC checks, which function much like personal checks. Some institutions also offer credit or debit cards linked to the HELOC account, allowing for purchases or ATM withdrawals.

Electronic transfers are another common and quick method for accessing funds. You can transfer money online from your HELOC directly to your checking or savings account. Additionally, some lenders allow in-person withdrawals at a bank branch or you may request funds by phone.

Understanding Repayment and Costs

Repaying a HELOC involves two distinct phases: the draw period and the repayment period. During the draw period, which lasts between 5 and 10 years, payments might be interest-only, or they may include a small portion of the principal. This structure keeps initial payments lower, offering financial flexibility. However, the principal balance may not significantly decrease during this phase.

Once the draw period ends, the HELOC transitions into the repayment period, which commonly spans 10 to 20 years. During this phase, you can no longer draw new funds, and you must make payments that include both principal and interest. This often results in significantly higher monthly payments than during the draw period, especially if only interest payments were made previously.

HELOCs feature variable interest rates, meaning the rate can fluctuate based on an index, such as the Prime Rate. This variability means your monthly payment amounts can change over time, potentially increasing if the index rises. Beyond interest, borrowers may encounter various fees, including annual fees, transaction fees for withdrawals, or inactivity fees if the HELOC is not used for a specified period. Some lenders may also charge an early closure fee if the HELOC is paid off and closed within the first few years.