The difference between a home equity line of credit or HELOC and other revolving credit lines such as credit cards is that equity in the home is used as collateral.
That means the amount of credit available is based upon the amount of equity not your credit rating.
  HELOC vs.
Home Equity Loan Unlike a home equity loan a HELOC provides you with a credit limit instead of an amount of money.
You can withdraw any amount of funds as long as the amount is under the credit limit.
The advantage to this is that you only have to withdraw what you need.
In a loan you have to withdraw and pay the entire amount whether you use it or not.
  The credit limit is determined by the amount of equity you have in your home.
Equity is the difference between the value of the home and the amount it is mortgaged for.
If your house was worth $300,000 and it was mortgaged for $200,000 you would could have a credit line of up to $100,000.
The reason many people turn to this arrangement is obvious it allows them to borrow large amounts of money if the house is valuable enough.
How a HELOC is Paid Off When a lender issues a home equity line of credit it gets the right to place a lien on your home if payments are not made.
If no payments are made after the lien the lender has the right to take other legal actions including foreclosure or seizing the home.
As in a mortgage a person with a HELOC agrees to pay the amount borrowed off in a series of payments with interest.
The amount of the payments is determined by calculating the interest, adding it to the amount borrowed and dividing that by the number of payments.
This is the same process used to calculate mortgage payments.
The reason many people use this arrangement is that an equity line of credit usually has a much lower interest rate than other forms of credit such as credit cards.
The borrower usually has a longer period to pay the amount borrowed off usually ten years.
This often translates into lower payments.
A HELOC often comes with a variable rate of interest.
This interest rate changes to match the prime rate or some other published interest rate.
That means the lender can raise and lower the interest rate and the amount of the payments can change.
Drawbacks to Home Equity Lines of Credit The main drawback to a home equity line of credit is that it can increase the amount you owe on your home.
Your monthly debt obligations will be increased and your income reduced by that amount.
If you cannot cover the additional payment you could end up facing foreclosure.
  Another problem with a HELOC is that it will reduce the amount of equity you have.
This will make it harder to borrow in the future and to take out a second mortgage if you want one.
There is also the possibility that your home value could decrease.
If you owe a lot of money on your home you could find yourself in a situation where your debt exceeds your home value or underwater.
That could mean you could not afford to sell your home.
The final limitation to a HELOC is that legally it is considered a mortgage.
That means you will have all the expenses associated with a mortgage when you take one out.
You will have to run a title search, get the home appraised, pay an application fee, closing fees, mortgage preparation fees and filing fees.
You may even have to take out mortgage insurance.
This can add several hundred dollars or more to the cost of the credit line.
Therefore it is always a good idea to investigate alternatives before taking out a home equity line of credit.
In some cases it may simply not be worth the hassle or expense to take one out.