What is a Home Equity Line of Credit (HELOC)?
In case you're not familiar with it, a home equity line of credit (HELOC) is similar to a revolving charge account, where you can borrow from the line of credit as you need cash, as well as pay back what you owe as you see fit -- so long as you keep the interest current.
The size of the home equity line of credit you may qualify for is based on the appraised value of your property, the amount you owe on your property (total of 1st mortgage, 2nd mortgage, home equity loan), and the loan to value (LTV) the lender is willing to extend to you.
Home Equity Line of Credit vs Home Equity Loan
Even though the two sound the same, a HELOC is not the same thing as a Home Equity Loan. A Home Equity Loan is more like a traditional mortgage in that you borrow a specific amount and make fixed monthly payments over time.
The advantages of a home equity line of credit are that most lenders don't charge any closing costs, and you only pay interest on the amount of the HELOC you are using.
The disadvantage of a HELOC is that you will typically pay a higher interest rate than you would for a home equity loan.
The Perils of a HELOC
Because a home equity line of credit is similar to a revolving charge account, it also comes with the same pitfalls as other forms of easy access to credit (credit cards, etc.).
Since it's so easy to simply write a check from your HELOC, if you're not good at fighting off the urge to succumb to instant gratification or quick and easy problem solving, you could end up maxing out your HELOC and have nothing to show for the money spent -- except for monthly minimum interest payments.
