A HELOC (Home Equity Line of Credit) is a lien on your property in the form of revolving credit secured by the equity in your home.
A Home Equity Line of Credit in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you may borrow up to.
Home Equity Line of Credit products at high loan to value ratios or of sufficient size (as a rule of thumb greater than $50,000) may be considered second mortgages for the purposes of mortgage underwriting.
Interest on a Home Equity line of Credit (HELOC) is mortgage interest and can be deductible on your taxes. Consult a CPA for more detailed tax advice.
Home Equity Lines of Credit work very similarly to credit cards. You have a maximum credit limit and you can use any amount of the credit line up to that maximum limit. You only pay on what you borrow so if you have a equity line with a 20k limit and you only use 1k of the equity line you only have to make minimal payments on the 1k that has been used. If you have no balance on the equity line there is no payment to make.
Home equity lines of credit are used often for debt consolidation. Paying off high rate credit cards and consolidating them into one low monthly payment helps with monthly cash flow. Usually the rate on the home equity line of credit is lower than credit card rates also.
A Home Equity Line of Credit is typically an adjustable rate product. Additionally, the index used for most HELOCs is the prime rate. Because the prime rate has seen numerous increases in the last half of 2005 and in early 2006, HELOCs seem to be losing much of their popularity.
A Home Equity Line Of Credit is often treated just like a credit card on your credit report. If you "max out" this revolving line your credit scores may drop depending upon your overall credit profile.
One of the advantages of a Home Equity Line of Credit is that you do not pay interest on the money until you actually need and use it.
HELOC's have a draw period and a repayment period. The draw period is the amount of years that you are allowed to use the credit that is in your account (or draw money out). Your minimum monthly payment is interest only. When you HELOC reaches its repayment period your minimum payment increases to include payment of the principal.
Most HELOC loan programs lend up to 95% to 100% of the value of the home. A few banks even lend up to 103%, provided certain conditions are met. As with other loan programs, borrowers must have perfect credit histories and sufficient incomes in order to borrow 100% of the home value.