What is a Home Equity Line of Credit?

A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral.

A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit. HELOC funds can be borrowed during the "draw period". Repayment is the amount borrowed plus interest. A HELOC will have a minimum monthly payment requirement which increases as the balance increases.

Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time.