Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit is a form of revolving credit in which the borrower’s home serves as collateral. By using the equity in their home, homeowners may qualify for a sizable amount of credit, available at an interest rate that is relatively low. Under the tax law--depending on the specific situation--borrowers may be allowed to deduct the interest because the debt is secured by the home.

Borrowers can draw on this line of credit for a fixed period set by the lender, usually five to 10 years. Over that period, borrowers are generally only required to pay the interest until an agreed upon date when the principle comes due. At the end of this "draw period," it may be possible to renew the credit line.

In determining the actual credit limit, the lender will consider the homeowner’s ability to repay by looking at income, debts, and other financial obligations as well as credit history.

There may be limitations on how the line of credit is structured. Some plans may require the homeowner to borrow an additional amount each time they draw on the line (for example, a minimum of $300) and to keep a minimum amount outstanding. Some plans may also require taking an initial advance when the line is set up.

Homeowners typically use these lines of credit to pay for big purchases related to their secured property, such as home additions.