What Is A Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit, or HELOC, is a specialized type of credit. It is similar to a credit card in that a lender agrees to provide you with credit, of which you can use as little or as much as you please. Thus, a HELOC is not really a loan, per se, but a line of credit (although I’ll generally refer to it as a loan for simplicity’s sake). The full amount of this line of credit is available to you for the full term of the loan. The “term” of the loan is the amount of time specified by the lender during which the line is active, generally 5 to 25 years. Payments (typically interest only) are made on a monthly basis and the amounts are based on two factors: the interest rate tied to your HELOC, and your average daily balance. You can learn more about the average daily balance and how to exploit it to decrease your monthly payment by reading our ebook here.

One major difference between a credit card and a HELOC is that the line of credit on a HELOC is a home equity line of credit. In other words, the collateral on the line is the borrower’s equity in his/her house. This means that, just like on a first mortgage, failure to repay the loan or meet its requirements can result in the foreclosure of the home. While this is not a frequent occurrence, it is something to keep in mind when contemplating using your HELOC to finance that new wakeboarding boat or home improvement project.

Many people use a HELOC as a second mortgage. One of the biggest distinctions between a traditional first mortgage and a HELOC is that the latter is what’s called an “open-ended” loan while the former is a “closed-ended” loan. The difference between the two is an important one:

For a closed-ended loan, the bank will ONLY apply money once a month and will only apply a FULL payment to adjust principal balance.

For an open-ended loan, the bank will apply money whenever it’s received and adjust principal balance multiple times a month.

Most people don’t realize how versatile HELOCs are. In addition to being used as second mortgages, they can be used for ALL SORTS of other things. To describe all of these uses in detail would be beyond the scope of this particular post, but here are a few to get you started:

* Debt consolidation
* Security in times of crisis or need
* Become your own bank and finance investments
* Leverage the credit in your HELOC to pay off your mortgage in 1/3 to 1/2 the time
* Earn rewards just like you would on a rewards credit card

And these are just a few. For the full spectrum of what you can really do with your HELOC, I suggest you purchase our ebook, Home Equity Secrets and start putting to work the principles therein.