A home equity line of credit is an option that a homeowner can use to borrow against the equity they have in their home. It is a loan that must be repaid, but withdrawals and repayment are not as structured as the traditional equity loan (second mortgage). The amount of credit available is determined by the amount of equity in the home and the credit profile of the borrower. Less paperwork is involved in obtaining a line of credit and the funds are usually available within a two-week period.

A line of credit is very much like a credit card with a maximum spending limit. The interest rate is dependent upon prime (prime lending rate), usually prime plus a certain percentage in a variable-rate revolving credit line. The money can be withdrawn all at once or in smaller amounts any time during the credit period (usually ten years). A homeowner can borrow, repay, and borrow again as often as needed during this period. The interest paid on a line of credit is usually tax deductible, but should be discussed with a professional tax advisor.

It is important to understand the terms of the line of credit before signing on the dotted line. Some lines have an advance (withdrawal) period and a repayment period during which time no money can be withdrawn. The most common lines are 5/10 or 10/20, where the first number is the advance period (in years) and the last number is the repayment period (also in years). Some lenders only charge monthly interest, or interest plus a certain percentage of the withdrawn balance. This type of loan balloons at the end of the loan period and the entire unpaid balance is due.

Additional information on home equity lines can be found on the Federal Reserve Web site at http://www.federalreserve.gov/pubs/equity/equity_english.htm.