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Explain a Home Equity Line of Credit

When times get tough, you may need to seek a new source of funds to keep your head above water. If you've owned your home for several years, one option is to take out a home equity line of credit. The bad news is that you'll probably have to pay a higher interest rate on your line than if you borrowed the money from your Aunt Matilda. On the other hand, it's not nearly as costly as taking a cash advance on your credit cards.

What is a HELOC?

The equity in your home is the portion that you "own" instead of the bank, based on the amount you've paid toward the mortgage to date. Your lender may permit you to open a line of credit based on the amount of your equity, giving you access to money for a purpose of your choice. You'll have access to the line for a specific period of time, typically ten years.

Size of the HELOC

So how large of a line can you get? Lenders will take the appraised value of your home, and subtract the amount you still owe, to determine your line of credit. For example, if your home is appraised at $200,000 and you still owe $150,000, you should be able to get a line up to $50,000. Mitigating factors, such as a poor credit score, can reduce your available amount.

Accessing HELOC Funds

In most cases, your lender will issue you a set of blank checks. When you wish to access your line, you simply write yourself a check for the desired amount, up to the limits of your line. Your lender may stipulate that you must take a certain minimum amount. You'll also be required to repay a minimum amount on a monthly basis, which is usually calculated as a percentage of the amount you've borrowed.

A HELOC is Not a Loan

A home equity line of credit differs from a home equity loan. With a loan, you borrow a specific amount, and repay with regular monthly payments. A line of credit can provide a perpetual source of funds. Each time you repay what you've borrowed against your line, you also regain access to the full amount. For example, if your line is $50,000 and you borrow $20,000, you have access to the full $50,000 again once the $20,000 is repaid.

Don't Default on a HELOC

Be sure not to default on your home equity line repayments. If you do, your lender could conceivably initiate foreclosure proceedings against your home.