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While many people have heard of and have even taken advantage of Home Equity Loans, many people aren’t aware of the fact that there is another type of loan that can be made against the equity which you have built up over the years in your home. This is commonly known as a Home Equity Line of Credit. It is in the same category but the way the money is dispersed is totally different.

A Home Equity Loan is usually a second mortgage on your home and all proceeds from the loan are paid out at closing. In a Home Equity Line of Credit, the funds are drawn upon, as needed, with the remaining funds still in the account. A Home Equity Line of Credit is actually a form of revolving credit. Your home serves as collateral to secure the loan. This form of loan is usually for major expenses such as medical bills, major repairs, remodeling and other large expenditures. It is not always in your best interest to use the money sitting in this account for daily living expenses.

However, there may be times that funds are low, and you may need to draw on it.The way this type of loan is figured is based on the value of your home minus what you currently owe on it. Let’s say the appraised value of your home is $150,000. The LTV ratio is 80%. This means that the total of ALL loans on the home cannot be greater than $120,000. At the moment, we are going to say you have an existing mortgage of $75,000. You could theoretically borrow $45,000 based on what the lender feels will be within your ability to pay back based on your credit history, your earnings and, of course, the amount of debt you currently owe.

Rather than giving you that $45,000 minus points, origination fees, processing fees, closing costs and other fees that might be assessed, you get to use that money much like a checking account. This is the most common way that a revolving line of credit is set up. Criteria for using that credit will vary from lender to lender. Some lenders have minimum or maximum amounts that you can draw at any one time and yet other lenders require you to maintain a minimum balance.

Paying back a Home Equity Line of Credit also varies from lender to lender. Some lenders set up interest only with the loan being payable in full when it comes to the term and other lenders set up monthly installments. There are some installment plans that you will find that at the end of the term you will still have an outstanding balance that needs to be paid because installments weren’t sufficient to cover principal plus interest. Some loans may be renewable at the end of the term and others might be payable in full with no renewal clause.

Just as when shopping for a first mortgage or perhaps college grants for women, make sure you shop around before deciding which Home Equity Line of Credit you would like to apply for. Make absolutely certain that you understand all the terms, conditions and contingencies before you close. Don’t be afraid to ask questions. Any reputable lender will be happy to explain what you need to know. And if you still need more information, by all means, don’t close until you understand what you are signing. Help is out there to provide the information you need just like what you can find in government grants for small businesses. Find someone who can advise you before you dig yourself farther into a hole. In the end, you will be happy you did.