Question:

Home Equity Line of Credit (HELOC) Definition

Answer:

A home equity line of credit (HELOC) is credit extended against the equity in the house as collateral. A HELOC is used as a credit card - only with a larger limit. For example, the lender may extend $30,000 on a HELOC and the borrower will be allowed to draw cash within this limit for a draw period of, say, 5 to 20 years.

For the time of the HELOC draw period you are required to pay interest only over the amount that you used. Any additional payment will go against the principal.

After the draw period is over, the home equity line of credit has to be repaid - either in a balloon payment, or according a repayment plan.

HELLOCs have become a popular loan choice. HELOC interest is tax-deductible in most states and this makes home equity lines of credit more preferable than a second mortgage. However, a home equity line of credit is still a loan taken against your house, so if you default on heloc requirements, you may have to deal with foreclosure.

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