A home equity line of credit (HELOC) is a type of second mortgage. A HELOC, also known as a home equity line of credit, is a line of credit drawn from the equity of your home. Due to the fact that these loans are lines of credit, you are typically given a maximum amount of monies that you can draw from. They work similar to the way in which a credit card works. However, the financing rules and benefits, as well as the repayment terms are different than that of a credit card.Your home equity is used as the collateral for the loan and you receive a line of credit from which you can draw money.

Benefits of a Home Equity Line of Credit

Using your home equity line of credit for home improvements, consolidating your high-interest debts, or keeping a “rainy day” fund, is a better financial alternative than using your credit cards. Here are the top 4 home equity line of credit benefits:

     You get a lower interest rate than you would with your credit cards. That means you pay less interest over the life of the loan.

      You get tax advantages that are not available with credit cards. With a home equity line of credit, the interest is usually tax-deductible.* Interest on credit cards is not tax-deductible.

     You get flexibility in your payment options. Lenders like Quicken Loans offer interest-only options to help make your payments more flexible. With an interest-only home equity line of credit, you have the option to pay only the interest for a pre-determined amount of time or pay interest plus as much or as little principal as you want.

      You get much larger credit limits. Quicken Loans offers home equity lines of credit up to $500,000. This is a great option to have when making a large purchase, such as remodeling your kitchen or adding an addition to your home.  How They Work

Initial Interest-only PaymentsWhen you take out a home equity loan, in the beginning years of the loan, you will be paying monthly payments on the interest-only. You are allowed to make additional payments towards the principle of the loan. If you do this, then it is important that you check with your lender periodically, to make sure that they are correctly crediting your outstanding loan balance.

Different Terms

With some HELOCs there is the possibility of a prepayment penalty, so make sure you check that out before you chose that specific loan. There are some HELOCs that have balloon payments. This means that your monthly payment will continue to be interest-only until at the maturity time, you will then payoff the outstanding principle balance. On the other hand, some HELOCs are structured so that after the interest-only payment period of the loan is completed, the loan then becomes self-amortizing. Self-amortizing means that the monthly payment becomes large enough to cover both the interest expense and the reduction of principle balance over the remaining term of the loan. Simply, this means that if you have the interest-only period of the loan for the first 10 years and the self-amortizing period for 10 years after that, then at the time of maturity, or the 20 years, you will then be in a position to pay off the outstanding balance.

Convert to a Home Equity Loan

There are some HELOCs that are structured in a way where they can be converted into a home equity loan. If you have any questions on a HELOC, then it is important that you talk with your broker or lender.