Legal Definitions - home-equity line of credit

A home-equity line of credit is a type of loan that allows a homeowner to borrow money using the equity in their home as collateral. Unlike a traditional loan that provides a lump sum upfront, a home-equity line of credit (often called a HELOC) functions like a revolving credit line, similar to a credit card. This means the borrower can draw funds as needed, up to a pre-approved maximum amount, over a specific period. Interest is typically paid only on the amount of money actually borrowed, not on the entire credit line available.

Here are some examples to illustrate how a home-equity line of credit works:

• Home Renovation Project: Imagine a couple, Sarah and Tom, who want to undertake a series of home improvement projects over the next two years, including updating their kitchen, renovating a bathroom, and adding a deck. They don't have an exact budget or timeline for each phase. Instead of taking out a large, fixed-amount loan, they secure a HELOC for $75,000. They can draw $25,000 for the kitchen renovation this year, then another $15,000 for the bathroom next year, and so on, only paying interest on the amounts they've actually used. This flexibility allows them to manage their projects as funds are needed and available.

  This illustrates a HELOC because Sarah and Tom access funds incrementally for various projects, only incurring interest on the specific amounts they draw, rather than receiving a single lump sum.

• Unexpected Medical Expenses: Maria, a homeowner, faces an unexpected medical emergency that requires significant out-of-pocket expenses not fully covered by her insurance. She has substantial equity in her home but doesn't want to take out a personal loan with a high interest rate. She applies for and is approved for a HELOC of $50,000. She draws $30,000 to cover the medical bills. Over time, as she repays the $30,000, the available credit line replenishes, meaning she could potentially draw from it again if another need arises, up to the original $50,000 limit.

  This demonstrates a HELOC's utility as a flexible financial safety net for unforeseen costs, where funds are drawn only when necessary, and the credit line can be reused after repayment.

• Debt Consolidation: David has accumulated several high-interest credit card balances totaling $40,000. He wants to consolidate these debts into a single payment with a lower interest rate to save money and simplify his finances. He uses the equity in his home to secure a HELOC. He draws $40,000 from the HELOC, pays off all his credit cards, and then begins making payments on the HELOC, which typically has a much lower interest rate than credit cards. This allows him to reduce his monthly interest payments and pay down his debt more efficiently.

  This shows how a HELOC can be used to consolidate higher-interest debts into a single, lower-interest payment, leveraging home equity to improve financial management.