A Home Equity Line of Credit is abbreviated as HELOC. This refers to a loan in which the lender agrees to lend a maximum amount within an agreed period. This differs from standard loans because the borrower is not advanced the entire sum up front, but uses the line of credit to borrow sums totaling no more than the amount.

A Home Equity Line of Credit in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you may borrow up to (this is not a check).

A draw period usually lasts anywhere from 5 to 25 years and allows you to borrow HELOC funds whenever you feel the need; you're only required to pay back the amount you use plus interest.

What's nice about the home equity line of credit is that often, you are only required to pay the interest until the end of the draw period. At the end of the draw period, you'll have to do one of the following:

• Pay back the full principal HELOC amount borrowed.
• Pay a Home Equity Line of Credit balloon payment.
• Pay based on a loan amortization schedule.

What makes a Home Equity Line of Credit so popular is that interest paid is usually deductible under federal and most state income tax laws; this makes that cost of borrowing money not as high!

They allow you to access the equity built up in your home with relative ease, and also afford flexibility in repayment of the money you use. However, as with all financial programs, they must be approached with wisdom and caution. Here are some facts with which you should be aware if you're to utilize a HELOC to your best advantage:

• HELOCs don't need the extensive documentation and paperwork that regular home loans do. Additionally. costs – recording fees, updated appraisals, etc. – are typically charged against the credit line, so you won't have to pay them out-of-pocket. This makes HELOC closing costs considerably lower than those of other home loans.
• HELOCs, in a variety of ways, operate like credit cards. For instance, the credit line is revolving, or open-ended, which means that amounts which are used and repaid are available to be used again – up to the maximum credit available, of course. However, unlike credit cards, which are unsecured debt, HELOCs are secured by the equity in your home.
• Interest charges for standard loans are computed on a monthly basis whereas HELOC interest charges, again taking their cue from credit cards, are calculated on a daily basis. This is because outstanding balances can change daily based on recent purchases. To arrive at the charges, the HELOC's average daily balance of the month is multiplied by the daily interest rate (the then-current interest rate divided by 365). This sum is then multiplied by the number of days of the particular month. Thus, HELOC minimum monthly payments can fluctuate based on two things: interest rate changes and new purchases made.
• HELOC interest rates are adjustable. As with other adjustable-rate mortgages, their rates are composed of two parts: an index and a margin. The index is a financial indicator that fluctuates according to economic forces. This is the part which actually causes the loan's rate to change. (Most HELOCs use the Prime Rate as their index.) The margin is made up of the lender's cost of doing business plus profit (your creditworthiness factors into this amount). The margin is established at loan approval and stays the same for the life of the loan.
• Annual percentage rates, or APRs, are good loan comparison indicators, except in the case of HELOCs. Don't compare a HELOC's APR with that of a regular loan; the term has slightly differing meanings for the two. A standard loan's APR takes into account points paid, origination fees, and other upfront costs. The HELOC's APR refers simply to its interest rate; no other fees are calculated into it.
• While most regular ARMs have predetermined initial periods – ranging from six months to ten years – in which the interest rate is fixed, your HELOC's interest rate can change monthly depending on its index. (Some lenders will “lock-in” a guaranteed introductory rate, but that will usually last for no more than a few months.) This means that HELOC rates can change very quickly.
• HELOCs charge an annual fee – typically between $50 and $100 – for as long as the credit line is open, regardless of your outstanding balance.