When asking what a home equity line of credit is we need to point out that a HELOC, as it is called in the industry, is different than a home equity loan. A home equity loan is where you apply for a lump sum to use towards certain needs you may have at that particular time. Once you receive the check, you spend it and pay back the loan monthly with interest. A home equity line of credit differs in that you are being offered a lump sum in the form of credit that can be used at any time during the term of the loan and you only pay back what you have used plus interest.
To simplify a HELOC with an example would go like this. You have 50,000 dollars in equity in your home and decide you need to fix your roof. You apply and are approved for a HELOC in the amount of 25,000 dollars for a 15 year term. This money will be the line of credit you draw upon to fix your roof that costs 5,000 dollars. You then take 5k from your line of credit and won’t be touching the rest to pay the bill. You will then pay back the 5,000 dollars plus interest through monthly payments and still have plenty on your line of credit if you need to use it sometime over the years for more repairs.
The downside to a HELOC is that your home is the collateral and there can be a few negatives to that in some cases. If you default on your line of credit payments, they can foreclose on your home. The negative aspect that is completely out of your control is that a decline of the housing market and value of your home by 50 percent, as we saw during the housing crash, can lead to your line of equity being frozen by the bank. This is a slight possibility so consider your area's housing market value before going this route.
Outside of those two negatives, a HELOC is a great way to have money at your disposal for any unforeseen issues that may arise in the future. It can be easier to handle financially as well considering you are only paying off what you use, as opposed to a lump sum as you would with a home equity loan.