An Introduction to Home Equity Line of Credit

By DoItYourself.com Staff

It is important to be aware of certain crucial factors when taking out a home equity line of credit (HELOC). A home equity line of credit uses your home as collateral. Because your home is likely to be your largest asset, it is not advisable to use your home equity line of credit for small daily expenses like food or clothes shopping. Consumers should ideally use their HELOC only for large expenses, such as medical bills, home improvements, or education.

When your HELOC is first set up, a lender will approve you for a specific preset amount of credit known as your credit limit. This is usually the balance you still owe on your current mortgage subtracted from 75 percent of the total value of your home.

Many plans set up a "draw period," which is a fixed period of time during which money may be borrowed. Some plans allow for renewals of a consumer's credit line, but others do not, and require that all money owed be paid off at expiration of the draw period. Other plans allow you to repay any outstanding debts during a fixed period of time after the credit line has ended, known as the "repayment period."

Some HELOC plans come with certain mandatory regulations already in place; for instance, sometimes a consumer is required to take out a minimum amount each time he draws on the credit line. Other plans may necessitate keeping a certain minimum amount of outstanding credit owed. Another common practice is requiring the consumer to take out an initial advance when the credit line is first begun.

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