Home equity loan: Home Equity Line of Credit Loans

Home equity line of credit loans are a way of using the money that you've invested in your mortgage by borrowing against it. Essentially, a home equity loan is a 'second mortgage' - a loan secured by your property. If you don't make good on your payments, the lending company or bank can force the sale of your house to recover their money.

There are two major types of Home equity line of credit loans - home equity loans and home equity lines of credit, also called HELOCs. Most lenders that offer home equity loans offer both kinds. A home equity loan for $10,000 and a home equity line of credit for $10,000 are two completely different animals though they have a lot of similar features.

Home Equity Line of Credit Loan

If you apply for and are granted a home equity loan for $10,000 at 7% APR for 15 years, you will receive a check or a deposit to your bank account of $10,000. That is the full amount of the loan that you can ever draw on that particular application. Depending on the terms agreed upon, you may have one to several months before you have to begin repaying the loan. You'll pay a fixed amount every month until the full amount of the loan and the interest charge is paid off. You'll know from the very start how much you'll be repaying.

Home Equity Loan - Line of Credit

A home equity line of credit - a HELOC - is much more like a credit card. When you apply for and are granted a home equity line of credit, the bank establishes a 'line of credit' - which functions just the way that a 'credit limit' does on your credit card. You may receive special checks or a plastic card with which to access your line of credit - but you don't receive the full amount at one time.

In fact, you don't have to take any of it immediately. You can draw on the line of credit at any time, up to the full amount of the line of credit throughout the agreed-upon life of the loan. Suppose that you're doing some home repairs. You can use your home equity line of credit to pay for $2,000 worth of roofing tiles. That leaves you $8,000 in your line of credit. Three weeks later, you can use your line of credit to pay for $4,500 worth of windows - and still have $3,500 left that you can borrow against.

If you then start paying back on your home equity line of credit, that money becomes available to you again. If you pay back $1,000 of what you've borrowed, you now have $4,500 on your line of credit.

HELOC Interest Rates

HELOCs usually have variable interest rates which are typically tied to the prime interest rate. The interest due on a HELOC is calculated on a daily basis based on the outstanding balance. HELOCs do not have interest rate adjustment caps, so if the prime interest rate were to go very high, the interest rate on a HELOC would also be high. The maximum interest rate that may be charged on a HELOC is 18%, except in North Carolina where it is 16%. Some home equity lines of credit do allow conversion to a fixed-rate loans.

HELOC Term

Home equity lines typically have a draw period of five to ten years, followed by a repayment period of 10 to 20 years. There are many variations on this theme.

HELOC Fees

Up front costs for obtaining a home equity line of credit are typically low. Many lenders charge no fees to set up a HELOC. Some lenders charge continuing annual fees or access fees.

Uses for a Second Mortgage

The most common uses for a home equity line of credit is to obtain equity from a borrower's home for some other purpose. Typical uses for the money obtained from a HELOC may include: