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Overview
HELOC stands for home equity line of credit. This variable rate loan lets you borrow against the value of your home minus your current first mortgage balance. Essentially, you use your available equity as collateral. By borrowing in this fashion, you can gain several benefits over a traditional loan.
Low rates
Because your loan's secured by your home, there is less risk to lenders. This encourages them to offer a lower rate on HELOCs than on their personal loans. Most home equity lines of credit are based on the Wall Street Journal Prime rate, and some have rates as low as Prime minus 1 percent. Of course, the rate you get depends on where you borrow and on your credit risk. Also, the rate can change over time.
Lots of uses
Unlike with, say, a first mortgage or an auto loan, with a home equity line of credit you can borrow a large sum of money for whatever you want. The biggest reason people cite is home improvements, but hundreds of others use these loans to pay for weddings or vacations, buy cars or pay college tuition. You can even use yours for something completely unconventional, so long as your lender approves it.
Variable balance
The "line of credit" in a HELOC's name is not just a clever title. It means that the loan works like a credit card. You can borrow as little or as much as you like at one time, up to the limit set by your lender. As you repay, the money is available to use again. Some lenders even offer "HELOC checks" or debit cards so you can use your loan as a direct form of payment. Note that your loan will have a specific draw period during which you are allowed to borrow against it. Usually it will be 3 to 5 years from the date you signed the loan. After that, you can only make repayments.
Tax deductions
In some situations you can deduct the interest from your HELOC on your taxes, just like you can first mortgage interest. This isn't true in all cases, but it's definitely worth asking your tax advisor.
Applying
Applying for a HELOC is not as easy as applying for a personal loan. You will have to apply in person, not online, and you will be charged closing costs--just as you were when you got your first mortgage. Also, an appraiser may have to visit your home to ensure it's worth what you say it is. The exact details will depend on the organization from which you borrow.
Considerations
Before rushing out to get a HELOC, think about the fact that it requires putting up your home to foot the loan. This means that if you default, the lender may be able to take your house. Consider whether what you're borrowing for is really worth that risk. Don't take out the loan for more money than you can comfortably afford to repay.
