When seeking to understand what a home equity line of credit is, it is important to first understand what home equity is.

Home equity is basically how much of your home you actually own. It is calculated by looking at the current market value of your home minus your outstanding mortgage balance.

If you have a home that has been appraised for $100,000 and you own 50,000 on your mortgage, you have $50,000 in equity. If you no longer owe anything on your mortgage and your mortgage is paid off, then you have 100% equity in your home.

So what is a home equity loan?

A home equity loan is a loan that is borrowed against what you already own in your home. Though just because you own 50% equity in your home doesn’t mean that you’ll be given that much in a home equity loan. Your debt, income and credit history will also be evaluated. Home equity loans offer tax savings due, because the interest paid on a home equity loan is tax-deductible. They’re often used to consolidate debt, to finance college educations, large vacations, home repairs or even a second home.

There are two basic types of home equity loans.

Traditional home equity, AKA a second mortgage, gives borrowers a lump sum of money that must be repaid over a designated period of time.

The second type of home equity loan is a home equity line of credit. This provides borrowers with a credit card or checkbook to use to borrow funds. With a home equity line of credit, if you have $20,000 in equity you can use the credit card or write checks up to that $20,000 amount. It’s kind of like a secured credit card. The benefits of this type of loan are that you don’t begin accruing interest until you make a purchase with your line of credit.

Most home equity lines of credit are only available for a certain time period, 10 years for example. There will also be limitations on how you use your credit. Some plans may require you to borrow a minimum amount each time you borrow and they may require you to keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up.

When you take out a home equity line of credit, they generally operate with a variable interest rate. This means that the interest rate you’re paying will change as the prime rate changes. This means it is important to calculate how much you’ll owe when you pay back your loan. Lenders sometimes offer a discounted interest rate for home equity lines. These introductory rates generally last only a short time period, six months for example.

As is the case with any loan, there will be application fees and service fees, and closing costs. It is important to weigh all the pros and cons of a home equity line of credit before you begin the application process.