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What is a home equity credit line?

When you want to borrow a sum of money from the bank, but you either don't know how much you need, or you know that you'll be making payments over a period of time (such as for your children's college tuition), a home equity line of credit (HELOC) may be a reasonable option. The worth of your home (minus any mortgage payments still owing) becomes collateral for your loan, and on the basis of this, the bank can extend you a line of credit.

First, the bank will want to check such factors as your income, credit history and other debts. If they feel confident that you will be able to repay the loan, you will then be given a credit limit (a percentage of your home equity). Each HELOC plan is slightly different, depending on the lender and the specific needs of the borrower. In general, you will have a fixed period of time over which you can use the loan. Thereafter, although you may be able to extend your credit, you will have to begin fixed repayments. In some cases there is a minimum that must be used at each withdrawal, so that you can't just use the credit for daily shopping needs.

Be sure that you thoroughly understand how the credit line works before taking this type of loan. Don't let yourself be tempted into spending more than you will be able to pay back. Be aware that there is often a variety of fees associated with the loan: There may be an application fee, filing fees, membership or maintenance fees and transaction fees. Additionally, you may need to cover the cost of a property appraisal, title search, mortgage preparation and attorney's fees. These can add significantly to the amount you'll have to repay to the bank. However, if you are confident of your ability to return the money borrowed, a home equity credit line can be a good way to pay for those big things that are important to you.

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