A home line of credit is an easy way to use the money you have paid on to your home, also called home equity. You can take out as much money as you need up to your equity limit for anything such as home improvements, emergency funds, or even that vacation you've been wanting to take. It is very similar to a home equity loan, but there are some significant differences.

What Is It?

A home line of credit is similar to a second mortgage that works as a great way to get money out of your home. You can take as much of it or as little as you want and you only pay for the money you use. In return, the bank puts a lien on your house until the debt is paid. As with other loans, there is an extensive application process in order to be accepted. You will be required to be reevaluated on a regular basis, which means you may be required to meet their lending institution every so often in order to be reevaluated.

Fees And Costs

Just like any other loan, there are closing costs required for a home line of credit at the completion of the application process. These costs can range anywhere from $100 up depending on the lender and your credit score. Annual fees are also tacked on to this type of loan along with an interest rate. On the bright side, it is considerably less than other loans and credit cards. One thing to keep in mind, however, is that this rate generally floats along with the prime interest rate.

The payments for this type of credit are considerably different than other loans. The financial institution defines the payment schedule, but how it is paid is up to the person who has borrowed the money. So long as a payment is made, you can pay the interest, the principle, or even the entire amount owed. Just be sure to read your contract carefully.

The Down Side

With as wonderful as a home line of credit sounds, they aren't without their bad side. One of the biggest downfalls of this type of credit is its flexible payment plan. It is a great idea for those who are good money managers, but for those who have difficulty in this area, these plans can lead to serious complications. Often times, people pay the interest only and forget to pay the principle as well. This causes the loan drag on for considerably longer than it should not to mention the large amount of money that is spent on interest. Once the due date arrives, you are required to pay the entire thing in full often leaving people scrambling to find the money.

Missing a payment can have serious consequences as well. Depending on your particular situation, you can lose your home very quickly and easily. This is a real shame considering the amount of money you have already put into it.

A home line of credit can be a fantastic thing for those who become educated about the system and use it wisely. These loans not only get you the money you need when you need it, but they can also cost considerably less than other traditional loans and credit cards.