Home Equity Lines of Credit

Like the home equity loan, a home equity line of credit is an available source of money that is offered by a mortgage lender based on your home's equity - it's worth versus what you owe on it. If you have positive equity in your home, meaning your home is more valuable than the amount you still owe in mortgage, then you can apply for a home equity line of credit which can put money right into your pocket or toward other expenses or purchases that you desire.

More flexibility than a home equity loan

A home equity line of credit (HELOC), offers much more flexibility than a home equity loan because it is not a single loan that you take out and have to repay as a second mortgage. Home equity lines of credit actually act as a revolving account that uses your home's equity as a security and maximum available credit limit. An example of the practical use of a home equity line of credit is if you owe $100,000 on a home that is professionally appraised at $200,000 in value, then you have $100,000 in equity in the home. A lender will then offer you a percentage of that amount - usually around 75% to 80% to use as a home equity line of credit. If you get a $75,000 home equity line of credit, and then spend $20,000 to buy a new car, then you will still have $55,000 in your credit line that you can use and you will have to begin repaying the HELOC immediately as a second mortgage on your home. As you pay down the HELOC, the amount you pay becomes available for spending again through the credit line.

Additional Restrictions

The home equity line of credit differs from a home equity loan in other ways as well. For one, the interest rate on a home equity loan is usually fixed, meaning that your payment on the 2nd mortgage will not change. Home equity lines of credit usually have adjustable interest rates which means that the amount that you will have to pay on the amount charged will change over time. Certain things you do can also force that rate to go up such as making late payments or possibly overspending on your credit line. In addition to those two restrictions, your home equity line of credit may also have other requirements such as a minimum charge amount that must be spent every time you use your HELOC. Home equity lines of credit expire after a term, which means you will no longer be able to access them unless you and the lender agree renew for a new term.