Understanding The Basics About A Home Equity Line Of Credit

By Terry Edwards

More than ever, people are looking at their homes as sources for much needed cash in times of difficulty. Regardless if you need to consolidate bills, pay off medical costs, or start a home improvement project, a home equity line of credit can provide a much needed boost.

A home equity line of credit, or HELOC as it is also know, can give you a large amount of money at low interest terms. Another important advantage is that a HELOC provides some great tax advantages as well.

Home equity lines of credit work in the same way a credit card does, with one catch. More on that in a moment. As a homeowner, you can take out a line of credit on the difference between what your home's current value is, minus your outstanding loan balance.

As a line of credit, you are free to borrow any dollar amount up to the available limit. You can make only the interest payment on the borrowed money if you like, or pay down the outstanding balance.

The interest rates on a home equity line of credit rise and fall according to the prime lending rate. This can be both good and bad. In 2004, it was great as the prime rate was at a record low, but since then it has been raised nearly 20 times. So, what was once a really great deal, with interest rates in the very low single digits, has turned around dramatically to where a fixed rate home equity loan is now your best deal.

Still, the advantages of only having to pay interest charges on the balance, or just the minimum payment, make home equity liens of credit attractive to many homeowners.

The catch I mentioned earlier is the fact that with any home equity loan or line of credit, you're putting your home up as collateral. You must keep that in mind, but it comes with a responsibility.