The Home Equity Line of Credit Loan

A revolving line of credit loan based on the equity in your home – commonly referred to as a home equity line of credit – can be an excellent source of small, short-term loans. An equity line of credit loan resembles a credit card in many ways. Depending on the amount of equity in your home, equity being defined as the difference between how much money you still owe on your loan and the current market-value of your home, your banker will set up a revolving line of credit with a certain maximum that you can borrow.

You borrow from this amount as you see fit, generally by writing checks. You are only charged interest on the actual amount that you borrow (as opposed to paying interest on the entire amount that you qualify to borrow) and as you pay off your loans that money then is made available to be borrowed once again.

Your revolving line of credit will have a variable interest rate, often derived from the prime interest rate as published in the WALL STREET JOURNAL. This means that your monthly payments can vary, depending on market conditions.

Typically your revolving line of credit will have a life of between 10 to 15 years. At the end of that time, any remaining balance will be converted into a standard fixed-rate second mortgage. Some revolving lines of credit have an interest-only option which allows you to make only interest payments and skip any principal payment.

This option reduces your monthly payments but by not paying down your principal each month you incur a great deal more in interest charges over the life of the loan. All things being equal, you are better off not taking advantage of the interest-only option.

An equity line of credit is an especially useful option to have if you occasionally need small loans that can be paid off relatively quickly. The interest on these loans is tax deductible, and the interest is almost always less than the interest you would pay for a credit card loan. If the flexibility and the convenience of an equity line of credit appeals to you, talk to your lender and see what your options are.