Understand Your Home Equity Line of Credit

Let us quickly understand this broad term, "home equity line of credit" first. A home equity line of credit amounts to an arrangement where a borrower's home acts as protection/collateral for a loan. This means that your home becomes a source of credit to finance home improvement projects, education, retirement programs, and other big ticket items. In maximum number of cases your bank or lending institution will allow you to draw upon a fixed amount of equity. This number is always based on a percentage of the appraised value of your property minus the rest of the money you owe on your mortgage.

Let me explain you this with an example. For instance, let's say that your home is worth around $200,000, and your equity line of credit allows you to access 50 percent of that value. Does that mean you can take out $100,000 worth of credit against your home? Not quite -- you have to subtract out how much you have left to pay on your house.

Always keep in mind that once the period during which you can draw your equity closes, you have to pay back the loan. It is a compulsion. This can happen all at once or over a fixed amount of time. Understand the conditions properly by which you need to repay the money before you start taking out an equity line, since the arrangement can have long-term consequences for your family's financial plan.

Now you will ask me is there any danger using the home equity as a kind of credit card? Absolutely -- if you fail to pay back the balance you owe plus your interest, you can get into creditor trouble and potentially lose your house or at least go into foreclosure. Trust me you might be able to get a better rate on your equity line of credit than you could by applying for standard consumer credit cards.

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I would like to conclude by advising you that always figure out various financing options before you institute paperwork for your equity line of credit, and take into account whether or not you might be moving in the next few years, since that may impact your rates and potential refinancing options.