A home equity line is a line of credit that is attached to your home. It can also be referred to as a HELOC. The home equity line allows you to tap into the equity you have built in your home and cash it out to cover expenses such as home repairs, college or vacations. Many people will use a home equity line to pay off debt. This is a risky thing to do.
A home equity line is different from a second mortgage because it is a revolving line of credit instead of a traditional loan. This means that you can turn to your home equity line and use it again after you have paid it off. It is similar to a credit card because of this ability. It may also have a higher interest rate than a traditional mortgage. Generally you will use a check to access this money. You do not have to get clearance each time you access it as long as you stay within your limits.
Recently many banks have been closing down home equity lines even when the account is in good standing. Banks are trying to balance the amount they have in the bank to the amount that they have loaned out to others. They have found that canceling home equity lines is a good way to do this. Many people look at their home equity line as their emergency fund. This is not a good idea. You should save up for an emergency fund that is in cash.
It is also important to realize that any debt you put on your home equity line is putting your home at risk should you default on the loan. You can weigh the safety of owning your home against the need for a particular item. It is also important to realize that when you are cashing out equity that you are not allowing the investment of your home to grow. If you strap yourself with additional payments on your home until you retire, you are preventing yourself from building wealth.
