A home equity line of credit works like any other line of credit. You are given an amount you can borrow and you draw money from the account as you need it. The money is accessed usually by a specially issued credit card or other means. You only pay interest on the amount you actually use. Home equity lines of credit usually have a low variable interest rate, but sometimes you can find a fixed interest rate. Your home serves as collateral on an home equity line of credit and should really only be used for major items such as education, home improvements, or medical bills and not for day-to-day expenses. As with anything else, when you use your home as collateral, if you default you can lose your home.
A home equity line of credit is 'revolving' which means you can borrow money, pay off the borrowed money and then borrow that money again. For example lets say you had a $7,500 home equity line of credit and you borrow $1,000 at a varible interest rate. That would lower your line of credit to $6,500. Now lets say you pay back $500 towards the principal, you have a $7,000 line of credit again.
There are advantages of a home equity line of credit. One major advantage is that the interest that you pay on your home equity loan may be tax deductible because the debt is secured by your home. For more information about that you will want to consult a tax advisor.
Something that you should watch out for while looking or applying for a home equity line of credit is to make sure you try to find one with a fixed interest rate, especially if you are going to have a balance for an extended amount of time. Right now interest rates are really low, but if you have a variable interest rate, when the interest rate goes up (it eventually will) you may be stuck with a balance that has a higher interest rate than you wanted.
