HELOC vs. Promissory Note: Understanding the Relationship

A home equity line of credit, or HELOC, is a loan secured by the equity built up in your home. Many homeowners obtain HELOCs and use them for major purchases, home improvements, travel and vacations or just to have extra cash for emergencies. Like most loans, HELOCs feature a legally binding promissory note borrowers sign promising to repay the loan. While a promissory note alone does not constitute a HELOC, it's the most important document contained in the loan.

HELOC Promissory Note

A promissory note is a legal agreement between a lender and a borrower to initiate a loan. In HELOCs and other loans the promissory note outlines all the terms and conditions, including its repayment. By signing the promissory note in conjunction with the HELOC's other loan documents, the borrower is agreeing to the terms of the loan. It's also the promissory note that a lender enforces, sometimes in court, in order to collect against a borrower defaulting on a HELOC's required payments.

HELOC Promissory Note Provisions

A HELOC's promissory note details the different aspects of that particular loan. HELOC promissory notes generally state their loan amounts, their repayment terms, including length, and their interest rates. Almost all loan promissory notes designate how payments will work, such as if they'll be made up of principal and interest or just interest-only. HELOC promissory notes also outline other requirements and restrictions particular to such loans as well as details particular to each individual loan.

Relationship to the Note

Once a HELOC is approved, the borrower attends a loan closing where a number of documents will be signed. At a HELOC's closing, the borrower will be presented with a promissory note that must be signed in order to activate the loan. The HELOC's promissory note will state the total amount of the credit line available to the borrower. HELOC borrowers, however, are drawing upon a line of credit and aren't obligated to spend the entire approved amount, something noted in their promissory notes.

HELOCs and Credit Lines

If your income is sufficient, your HELOC loan application could be approved for up to 80 percent of the value of your home. If your home is worth $250,000, for example, you may be able to qualify for a HELOC of up to $200,000. An existing first mortgage on your home will affect your HELOC's approved amount, though. If you have a first mortgage with a balance of $150,000, for instance, you may be able to obtain a HELOC for up to $50,000.