What Is a Home Equity Line of Credit?

Typically, to buy a house, you need a mortgage. A mortgage is nothing more than an installment loan with a house as collateral. The loan is for a fixed amount. Payments are for a fixed amount every month, and once paid, that part of the loan goes away and cannot be used again.

A home equity line of credit also uses a house as collateral. The mortgage company is first on the list to get paid if the house has to be foreclosed. Other loans that use the house as collateral are considered second loans. However, if the second loans are not paid, the lender can foreclose on the house, even if the first mortgage is being paid on time.

A home equity line of credit is a second mortgage and a revolving credit loan. Unlike a home equity loan, an installment loan that has a fixed balance and fixed payments, a home equity line of credit has a variable balance, variable payments, and in many cases, a variable interest rate. 

A home equity line of credit operates similarly to a credit card. In fact, many home equity lenders provide borrowers with a credit card that provides direct access to the home equity line. The line will have a set maximum balance. As long as the borrower stays under that limit, they can borrow as much, or as little, as they like at any time, including reborrowing money that has already been paid. The borrower must make a minimum monthly payment. The minimum payment is calculated based upon a formula agreed to when the line of credit was opened. Usually, the minimum payment is a set percentage. The lender will charge interest on only the amount of the home equity line that is used. So, if a borrower does not use the home equity line, or if the line has a balance of zero, no payment is required, and no interest is charged.

A home equity line of credit exists for as long as both the lender and the borrower agree.

Want to know if a home equity line of credit is right for you? Contact the experts at Key Credit Repair today!