Line of Credit

Posted In: Mortgage Basics

Unlocking home equity has become increasingly popular in recent years with homeowners. One method of accessing that equity is a line of credit, which is also known as a HELOC or open end home equity loan. A traditional second mortgage gives you a lump sum of cash and requires you to pay the principal amount, plus interest, over the life of the mortgage. A line of credit is similar, except that it can also be used as a revolving credit line.

How it Works

With a line of credit you can borrow against the balance, and use that money for various diverse uses. Typically, if the line of credit's balance exceeds the original mortgage amount you'll pay back the difference at a variable interest rate. But if you have a fixed-rate line of credit, and have paid off, say, $10,000 of the principal, you can borrow that $10,000 and pay it back at the original fixed rate.

Prudent Use

Lines of credit have been very popular in recent years, although not all lenders offer them. They can be a great tool for some, especially people with a moderate amount of disposable income. But a line of credit can also be dangerous for those who lack fiscal discipline. Borrowing recklessly against a line of credit can result in serious debt and the possibility of losing one's home.

As with any mortgage, if you're applying for a line of credit make sure you read the fineprint. Double check how interest is calculated if you exceed the original mortgage balance. And treat this type of financial tool carefully, so it works to your advantage.