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Originally Posted by BlaqK20
Ok, so I think I get this. It's pretty much a credit card, but instead the amount you take out just adds on top of your home value/equity?
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Close! Money taken out of a HELOC (Home Equity Line of Credit) subtracts from your home equity, it doesn't add to it. =)
Money taken out of a HELOC adds to your home debt.
Situation 1:
Morgage: 100,000$ @ PRIME - 1%
House value: 300,000$
HELOC max: 100,000$ @ PRIME -0.5%
HELOC current balance: 0$
Home Equity:
200,000$
Home Debt:
100,000$
Situation 2:
Morgage: 100,000$ @ PRIME - 1%
House value: 300,000$
HELOC max: 100,000$ @ PRIME -0.5%
HELOC current balance: 50,000$
Home Equity:
150,000$
Home Debt:
150,000$
A HELOC is sort of like a morgage that you can take money out of.
The advantage of a HELOC is that you don't pay money on money you don't need.
The disadvantage of a HELOC, outside of the usual dangers of credit, is that it eats into your house's equity, and the debt is guaranteed against your house.
But, really, if you have no plans to go bankrupt (depending on juristiction), and have debt and house equity, rolling the debt into a HELOC is often a good idea. It is better to have low-interest debt than high-interest debt.