Home Equity Line of Credit - What It Is and How It Works . . .

The home equity line of credit (HELOC—pronounced HEE-lock) works like a credit card that uses your home for security (collateral). In other words, if you don’t pay off the amount of credit you use, you could forfeit your home. Not pretty.

The HELOC is not a "loan," per se, because it is secured (you own your home equity. . . equity means ownership). Since it is a “credit line,” not a “loan,” you owe interest and principal on only the amount you use (borrow). For a home equity loan, you owe interest (and principal) on everything you borrow—the entire amount—from day one until it is paid off in full.

Because a home is the largest asset most people have, many homeowners make use of their home equity line of credit for anything from home improvements to medical bills to vacations (though we rarely recommend the latter). Debt consolidation is another biggie!

* Go to your bank, or favorite lender. * Ask for information about a “home equity line of credit, a HELOC. * Listen to what the loan officer has to say. * If the deal doesn’t sound good, ask, “What’s your best deal?” It’s possible to be approved without an appraisal, if real estate prices have been going up in your area, you’ve paid the principal on your mortgage down a little bit, and the lender is also familiar with the general area of your address. Oh, and the amount you’re asking for has to be a “no brainer,” e.g. $30,000 in an area that has appreciated $100,000 in the last 18 months. Even a “no brainer” can take 30 days or so to approve. Once your HELOC is approved, you’ll be informed of your credit limit. Usually this is a percentage of your home’s appraised value less the amount you owe on your current mortgage.

Lenders will also consider your ability to pay by analyzing your income, other debts, credit history and financial responsibilities.

HELOCs are set for a fixed period. During this time, perhaps 5-10 years, you can borrow money up to your HELOC limit. When the term ends, you may be able to renew the home equity line of credit. Find out before you sign the papers, so you’ll know whether or not you can do this if you need to!

Usually, the draw period (that’s the duration of time you’re allowed to spend from this account) is 5-10 years with a repayment period of 10-15 years, even up to 30! The most common repayment period is twenty years.

Once you have been approved for a HELOC, you have the benefit of borrowing up to your limit anytime. For your HELOC, you are given special checks and a credit card. The checks are "special," and do not have routing numbers that allow them to be used to pay by telephone or on the Internet. They simply don't work except as physical checks written on paper. But the credit card will work anywhere. Either way, you pay interest only on the amount used, or "borrowed; whereas on a home equity loan, you must pay interest on the entire loan for the full term or until the loan is paid off. For this reason HELOCs are the product of choice.

Once you have received your HELOC, there may also be other fees. These may include maintenance or annual membership fees or transaction fees with withdrawals.

Although with all of these fees, you could spend hundreds of dollars, since your home is used as collateral, your annual percentage rate is extremely lower than any other type of credit, especially regular mortgage interest! This difference could allow you to offset all the costs of maintaining and establishing the HELOC. Sometimes, the lenders waive all of the costs for closing the deal. You’ll never know until you ask!