What is a Home Equity Line of Credit?

With a home equity line of credit (often called HELOC), the borrower has a credit limit rather than being given the full amount upfront like in a traditional loan. The underlying collateral for a HELOC is the house itself, so most homeowners use it for home repairs or improvements. Using the house as collateral means if you default on the loan you may be forced to sell your home or refinance.

The repayment is for the borrowed amount plus interest, and as you pay it back the credit can be used again. If you borrow $5,000 from a lender and use $3,000 to make roof repairs, you have access to $2,000 of your equity line of credit and once you pay off $2,000 of it, you will now have access to $4,000 of your credit line. Interest rates for HELOCs are variable, meaning they fluctuate over the life of the loan. The amount of your payment will depend on both the current interest rate and credit balance.