How They Work

• When you are approved for a home equity loan, you will be given access to a credit line rather than a lump sum payment. The amount of your credit line depends on the amount of equity you have in your home. Lenders vary as to what percentage of your equity you will be allowed to borrow against, usually around 80 percent. Some will go as high as 100 percent or even 125 percent when the economy is better. As you need the money from your home equity line of credit, you write special checks provided by the lender to access the funds. As you start withdrawing the money, you will have to make minimum payments on the balance each month. You will have access to the funds for a set time periods, usually 10 to 20 years, after which you will have to repay the amount owed, all at once or over a period of time.
  
  

Interest Rates

• Unlike most mortgages and home equity loans, most home equity lines of credit have an adjustable interest rate that can change each month, similar to an adjustable rate mortgage, so you monthly payment will fluctuate. When comparing potential lenders for a home equity line of credit, you should look at the maximum rate increases both each month and over the life of the loan. A lifetime cap limits how much the interest rate can increase over the life of the loan.
  
  

Considerations

• A home equity line of credit does not usually have any closing costs, but you may have to pay an application fee and annual fee for access to your line of credit. You will also have to prove the value of your home and provide documentation of any other loans you have taken out that use your home as collateral. A home equity line of credit can provide tax advantages as the interest on the first $50,000 can be claimed as an itemized deduction. If you file a joint return, the interest on the first $100,000 can be deducted.