Home Equity Line of Credit Explanation

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A home equity line of credit is a revolving credit line. You receive a certain amount of money by using your home as collateral. People use home equity lines of credit for home renovations, luxury purchases, medical emergencies and a number of other activities. A home equity line of credit is convenient but risky because you could lose your home. The lender has the legal right to take your home if you cannot repay the money.

Various factors determine your credit limit. Your home's value is the most important factor. It determines the base amount of credit you can receive. You are eligible for a higher credit limit if you own your home outright. If you do not own your home outright and still have a mortgage, the lender takes a percentage of the home's value and subtracts it from your mortgage.

Consider a house valued at $50,000 with $20,000 of payments remaining. The lender could take 50 percent of the value, which equals $25,000. After subtracting the $20,000 you owe on the home, your potential credit limit is $5,000. Your current financial situation and credit history count as well.

You usually have two ways to access your home equity line of credit. Some lenders issue special checks specifically for your credit account. Another method is to use a credit card similar to a bank debit card. You may also have limitations on how much money you can withdraw. For instance, a plan could require a minimum withdrawal amount of $200.

According to the Federal Citizen Information Center, most home equity plans set a fixed period during which you can borrow money. The period is a "draw period," and your credit line expires after the deadline. You may have the option to renew your credit. If not, you cannot get more credit without reapplying. Some plans require payment in full when the draw period expires. Others give you a limited amount of time to repay. No matter your repayment plan, you must repay the money in full. Failure to do so could cause you to lose your home.

If you sell your home, you must repay your home equity line of credit immediately. Most plans also prohibit you from renting your home. You have three days from the time your account opens to close it without penalty. You receive reimbursement for any fees paid to open the account.