What Is A Home Equity Line Of Credit (HELOC)?

By: Jon Henshaw, M.A.

SallieMae defines a HELOC, or Home Equity Line of Credit as:

A variation of the home equity loan that allows a homeowner to draw money against (i.e., write checks) the home's equity on an ongoing basis. Generally, a home equity line of credit features a variable interest rate, a specific time period during which money may be withdrawn, and a repayment period following any withdrawal. The credit also revolves on a home equity line of credit: as soon as principal is repaid, it may be borrowed again.

People open a Home Equity Line of Credit for many reasons. Some households are interested in remodeling, or adding on to their home. Other households open a Home Equity Line of Credit, because they want a financial safety-net. While others open a HELOC, because they need quick access to liquid assets.

Erik Hurst and Frank Stafford, in their paper, Home is Where the Equity Is, stated that one of the main reasons households refinance is so they can gain access to accumulated home equity. They refer to this action as consumption smoothing.

For example, if a household has over-consumed, and they're having difficulty paying off creditors, a HELOC may be their best option for consolidating their debt. A Home Equity Line of Credit usually has a dramatically lower interest rate than traditional credit cards, so paying off high interest loans with a HELOC can be a wise choice for many households.

If consumers are using a HELOC to consolidate debt, one of the most important things to remember is to have a debt elimination plan. Otherwise, they may end up in an even worse financial situation. This is especially true if disaster strikes. Under the right circumstances, it's very easy for consumers to find themselves owing high-interest creditors again, and still have a Home Equity Line of Credit completely tapped out.

A Home Equity Line of Credit is available from most mortgage companies and banks. If you're interested in pursuing a HELOC, contact your local bank or mortgage company.

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