Home Equity Line of Credit or (HELOC) in its shortened form is a regular loan, but the collateral for the loan (asset which the loan is secured against incase the borrower fails to pay) is the equity in the borrower’s home. In order to understand what a Home Equity Line of Credit is, you need to first understand what equity is.  If somebody takes out a 100% mortgage on a home worth $100,000 and has repaid $25,000 of the mortgage to the lender, then they essentially now fully own $25,000 of the property. Meaning if they sold the home the lender would get $75,000 and the owner would get $25,000. It is this money that is considered equity.

The reason it differs from a regular home equity loan or any other loan is because borrowers don’t get the full amount up front, but rather use a line of credit like a credit card and are given a credit limit. Throughout the terms of the loan you can borrow money up to this limit and then it must be paid back with interest. This is done on a monthly basis.

Home Equity Line of Credit works on a floating interest rate and is therefore similar to an adjustable rate loan, because interest rates fluctuate throughout the term and are not fixed.