What is a Home Equity Line of Credit?

A home equity credit line is a kind of loan which is secured against a property as collateral. It is a type of revolving loan which allows the borrower to loan funds at the time and in the amount the borrower chooses, up to a maximum credit limit for which the borrower has been qualified. The credit limit is usually determined by the total equity of the property, as well as the borrower's ability to pay- evidence of which can include income, debts, other financial obligations, and credit history. Simply put, equity lines are revolving accounts much like credit cards that can be paid down or charged up for the term of the loan.

A home equity line of credit can be used as a borrower needs it up to the available credit line. Any portion of the loan can be used any time. The minimum payment due each month is interest only. Interests can be of the fixed or varied type. But it typically involves the variable type.

Home equity lenders can loan borrowers up to 85% of the appraised value of the mortgaged property in this type of loan. But if the borrower still owes a certain amount from the first mortgage, this will be deducted from the 85%.

Since the borrower's home serves as collateral, they are wary in using this type of loan for day-to-day expenses, and instead use it for major items such as education, home improvements, or medical bills.