What is a home equity line of credit?
A home equity line of credit is much like a credit card, except that you are using your home as collateral for the money that you borrow. You typically received a much lower interest rate and the interest is frequently tax deductible (consult your tax advisor). You are given a maximum line amount that you can borrow against and pay back as often as you like. You must make a minimum payment each month.
Since it's set up as a line of credit, you won't be charged until you use the funds. Once you have an active monthly balance, your monthly payments are based on how much you borrow and the current rate of interest on the account.
The most common ways to access your line of credit are with checks or a debit card. You only pay principal and interest on the money as it is borrowed. Once the money is paid back, you may use the funds again.
A draw period is a time frame during which you can both borrow and pay back on the line as many times as you like. During the draw period, you are required to make minimum monthly payments.
When the draw period is over, a repayment schedule will be set up. Because it is a flexible line of credit, a Home Equity Line of Credit is particually useful in situations where you are uncertain how much funding you will need or you anticipate having to borrow again in the future.