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Home Equity Line of Credit Explained!


A home equity line of credit (commonly referred to in banking circles as a HELOC) is a second mortgage taken out against the equity in your home. Instead of being paid in a single lump sum check and then repaid in monthly installments like a traditional mortgage, a home equity line of credit works in a similar fashion to a revolving charge account such as a credit card. The amount of the home equity line of credit is the credit line and transactions against that line reduce the available credit. 

Payments made to the line replenish the available credit. Most banks may even issue a home equity line of credit Visa or Master Card which can be linked to the home equity line of credit account, making it seem even more like a credit card. The one difference is that, while a credit card account is typically open-ended and will remain in force as long as the payments are kept current, a home equity line of credit has a maturity date after which the line can no longer be used and by which outstanding amounts should be paid in full.

A home equity line of credit account can be a very good source of emergency funds or financing for home improvements, large purchases, or pretty much any purpose the borrower desires. Some people have used home equity line of credit funds as a source of capital for an investment, borrowing the funds at, say four percent interest and investing them in a mutual fund or bond paying some higher amount. This can be a risky prospect, but can be lucrative if it pans out.

How to use a home equity line of credit

Using the home equity line of credit account is, in nearly every way, the same as using a credit card. If you've been issued a home equity line of credit card by the lender you may even confuse it with a credit card. As a matter of example, let's suppose you have a home equity line of credit with an available credit line of $15,000. You decide you want to make some home improvements and you pay for $9,500 worth of supplies and contractor fees. You now have $5,500 remaining in available credit on the home equity line of credit. As you make payments, the line will increase by the amount of the payments, less the interest rate. Until the $9,500 is repaid you will only be able to use an additional $5,500 or that amount, plus payments made, less interest charged.

If the lender did not issue a home equity line of credit card, your line withdrawals will be conducted via checks drawn on the account. Writing a home equity line of credit check is just like writing a check from a regular checking account, so it is important to remember which checkbook goes to which account. Most banks put some form of identifying marks on their home equity line of credit checks to make it easier for customers to differentiate them from their regular checking account checks.

Interest paid on a home equity line of credit account may be tax deductible; making a home equity line of credit account a small but viable tax shelter of sorts, but some home equity line of credit accounts may charge a number of different fees. These may include, but are not limited to closing costs, appraisal fees, transaction fees, and annual membership fees.


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