What Is a Home Equity Line of Credit Loan?

A HELOC is a line of credit that works much like a credit card, and is secured by the equity that you have in your home. For a HELOC, a bank will establish an account that you can take funds out of as you need. The "credit limit" is determined by the amount of equity. A HELOC is opened for a specified term during which you may borrow money. Repayment terms vary by lender and program, but generally the repayment period begins at the end of a specific period. Until that time, borrowers may either pay interest only (on funds that were used) or make larger payments to get ahead.

A home equity line of credit provides a loan for a relatively large sum of money at competitive interest rates. Many consumers prefer a HELOC over a traditional home equity loan as it offers more flexible terms. HELOCs are a convenient means of obtaining a large loan to cover major expenses such as college tuition or remodeling costs. During the withdrawal period, the borrower can choose to make interest-only payments or pay ahead, making a HELOC a particularly good choice for a family who can reasonably expect its income to increase in the coming years.

HELOCs provide some advantages over other traditional forms of credit. In most cases, the interest that you pay on your HELOC is tax-deductible, which results in savings over the entire term of repayment. Another benefit of a HELOC is that you only pay interest on the money that is used as it is withdrawn; you are not held to repaying a specific total amount.

When you borrow money in the form of a HELOC, you are putting your home's equity up as collateral. This means that if you go into default, you risk losing your home. Before signing any contract for a HELOC be certain that you have read and understand all of the terms, including repayment terms, interest rates and fees associated with the loan. If there is a balloon payment due at the end of the loan term, it is important to discuss in advance what options you will have in the event that you cannot pay in full at that time.

Taking out a home equity loan or a HELOC is a major financial decision and one that should not be rushed into. Because interest rates and terms can vary greatly from lender to lender, it pays to shop around for the loan that best meets your particular needs and budget. The simplest way to get information on a wide variety of loan programs is to use an online banking quote website that compares features and rates on loans from multiple lenders. When shopping for a HELOC it is important to take into consideration all of the fees that are associated with the loan, not just the interest rate. Closing costs and early payment penalties can add a substantial amount to your loan payments, and may make a lower interest rate come out as a less attractive option in the final analysis.