Access to Money

With a home equity credit line, you can access an amount of money, predetermined by your bank and based on the value of your home, at any time during the credit line time period. Usually you can write checks or use a card, much like a credit card, to either obtain cash or make purchases using the money from your credit line.

Borrowing Limits

Banks and equity lenders have different limits on what you can borrow. The general guideline for home equity lines is usually 85 percent, meaning that the lender will allow you to borrow up to 85 percent of the value of your home, subtracting what you currently owe. The percentage may be different for each lender, the geographic area and the value of homes in your area.

Interest Rates

The interest rate on an equity credit line is usually variable, meaning that the rate is tied to an "index rate," such as the U.S. prime rate. In other words, you may hear something like, "prime plus three," which means that your interest rate will be the prime rate plus 3 percentage points. This also means that your interest rate can change.

Cost

Some lenders or banks may charge closing costs, just like closing costs in a regular mortgage, as well as usage fees. The best way to determine what your costs may be is to ask the lender what charges occur at application, closing and during the period in which your credit line is active.

Payment Terms

Home equity credit lines may have various payment options. For example, you may only be required to pay the interest that accrues on the portion of the line you use. Or, you may have a payment that is equal to a certain percentage of your outstanding balance plus interest.

Uses

Since a home equity line may be tax deductible, it is definitely good to use for home improvements, such as remodeling. Your credit line may be useful for educational expenses, as well. If you think you may use the money at different times, such as during a few years when you are remodeling your home, then an equity credit line may be a great choice.

Source:

"Barron's Dictionary of Banking Terms"; Thomas P. Fitch, 2000

Federal Trade Commission: Home Equity Credit Lines

More Information:

The Federal Reserve Board: Home Equity Lines of Credit