Home Equity Credit Line

A home equity line of credit (HELOC) is a form of second mortage based on home equity - the difference between the fair market value of a property and the amount of any mortgages or other liens against the property. The bank opens a line of credit with credit limit equal to or less than the home equity, creating a cash reserve upon which the homeowner can withdraw money as needed.

Home equity credit lines are commonly used to finance home improvement projects, major purchases, tuition expenses, and medical expenses.

Considerations

Interest rate: The interest rate of a home equity credit line may remain constant throughout the life of the loan (fixed rate), or may be set to fluctuate with the prime rate (variable).

Draw period: The time period during which homeowners may access their line of credit is limited, and known as the draw period. Typically, this is on the order of 10 to 30 years.

Terms of repayment: If an outstanding balance remains after the draw period, HELOCs may require payment in full at that time, or may allow for repayment over a number of years.