A Home Equity Line Of Credit (HELOC) is a type of loan that is secured using your home as collateral.  Since it’s a credit line you can draw money on it as needed up to a predetermined credit limit similar to a credit card.  Each month interest is due on the account but there are no scheduled principal payments so you can pay it down the home equity line of credit whenever you have extra money.


Since the credit line is secured by the value of your home HELOCs generally have lower interest rates than other types of credit lines.  This makes them a popular source of credit for making major purchases like home improvements, recreational vehicles and for consolidating credit card debt.  When the money is used for home improvements the interest you pay may even be tax deductible (check with your accountant or tax preparer).

There are several things that make a HELOC unique:

1.  It is a line of credit instead of a loan, so there are no fixed payments.

2.  In most cases you only have to pay the accrued interest each month.

3.  The interest rate is variable and is usually based on the Prime Rate.

4.  If you use the money for home improvements your interest may be deductible.

5.  A Home Equity Line Of Credit (HELOC) can be 1st position or 2nd position.

Your HELOC has a credit limit which is based on the value of the home you are borrowing against. Leading up to the credit crisis home prices had been soaring on an annual basis. Lending standards became lax, both banks and consumers became comfortable with constantly escalating home prices. Consumers were over spending and using the new equity in their homes to increase credit lines to pay off debt and some banks were willing to lend up to 120% of the value of the home.

During the credit crisis home values in many areas fell by as much as 50%. This caused a panic among banks to freeze or lower the credit limits on outstanding Home Equity Credit Lines. This caused a cash crunch for many consumers who relied on their HELOC for financing. However, when you look at it from the bank’s point of view they had little choice when the value of their collateral was dropping so rapidly. It’s not uncommon today to find that banks will only lend up to 80 or 85% of the value of the home. This serves as protection against a further drop in home prices.