How does a Home Equity Line of Credit work?

A line of credit is based on the amount of equity in your home. For example if you owe $100,000 on your home, and the appraised value of your home is $150,000, then you have $50,000 in equity ($150,000 - $100,000 = $50,000). Let s say you d like to tap into $25,000 of that equity for home improvements, education costs, pay off credit cards, etc
You meet with a home loan consultant and based on your credit score, income documentation, debts, and other financials they can approve you for a home equity line of credit in the amount of $25,000. Based on your financial situation and credit score a rate is determined by the bank. A lower credit score = higher rate and vice versa. Home equity lines of credit (aka HELOCs) are primarily based on the Prime Rate set by the Federal Reserve. When the prime rate changes, so does your HELOC payment.
With Home Equity Lines of Credit, you typically only pay interest on the amount you borrow. For example, while your credit line may be $25,000 if you only use $10,000 of it, that s all you pay interest on. In addition, you usually have the option to pay interest only for the first 10 years of you HELOC. For example, if you owe $10,000 on your Home equity line of credit, and the current interest rate is at 8% - your monthly payment will be $66.67 ($10,000 x 8% = $800/year or $66.67/month).
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