A HELOC is a line of credit extended to a homeowner that uses the borrower’s home as collateral. Once a maximum loan balance is established, the homeowner may draw from the line of credit at his or her discretion.
Home ownership can be a great long-term investment strategy. Your mortgage debt goes down, because you make regular payments against both the interest and the principal borrowed. This increases your home’s equity, the difference between what you still owe and the value of your home. A HELOC lets you borrow against this growing equity. If used prudently, a home equity line of credit (HELOC) can help you reach your financial goals. But with a HELOC, you might also be tempted to use your home as an ATM. You need a plan to use this line of credit wisely, and be aware of potential risks. You can delay repaying the principal balance as long as you cover the interest each month. However, this short-term credit advantage can mean a long-term debt problem.