What is a HELOC?
In case you're not familiar with the acronym, HELOC stands for Home Equity Line of Credit. A HELOC is similar to a revolving charge account, where you can borrow from the line of credit as you need cash over the course of what's known as the draw period.
During the draw period, you will usually have the option of making interest-only payments. Later, at the end of the draw period (usually 5-10 years), your monthly payment will increase to include principal repayments.
The size of the home equity line of credit you may qualify for is typically 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.
HELOC versus Home Equity Loan
Just to be clear, a Home Equity Line of Credit 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 a fixed period of time.
The main 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 portion of the line of credit you are using -- not on the total amount of the line of credit you qualify for. And, unlike revolving charge accounts, you may also be able to deduct the interest payments.
One disadvantage to home equity lines of credit is that you will usually pay a higher interest rate than you would for a home equity loan.
Also, because a home equity line of credit is similar to a revolving charge account, if you're not careful, you can get into the same kind of debt trouble that credit card abuse can lead to.