Function

• A bank will allow you to take a loan that is secured by the equity that you have in your home. Some consider the loan similar to that of a credit card, since the bank will approve you for a specific amount of credit. Different banks have their own guidelines. Some may allow you to take a certain percentage of the equity in you home, sometimes 75 to 85 percent, based on the appraised value of the home. Most loans allow you to borrow up to the credit limit at your own discretion.
  
  

Interest

• Home equity credit lines usually carry a variable interest rates based on a publicly available index. Since these indexes fluctuate, so will the interest rates on your home equity credit lines. Banks and lending agencies that offer such lines of credit calculate interest in different ways; find out what index your bank uses so that you can monitor your interest rate. Some lenders will provide an introductory rate, with a lower interest rate at the beginning of the loan period for a limited time. By law, the bank must offer a cap on how much the interest can increase during the time you have the loan. Some banks may also allow you to convert the loan to a fixed-rate plan during the loan period.
  
  

Uses and Benefits

• Home equity lines of credit usually have better interest rates than a traditional bank loan or credit card. Some homeowners use these loans to pay off higher interest rate credit cards. In most cases, you can deduct the interest you pay on the home equity loan from you income taxes. Some homeowners use them to consolidate outstanding debt, resulting in a single, lower-interest-rate loan. If you encounter large expenses such as an unexpected medical bill or new roof, you will have a low-interest line of credit to cover the expenses.
  
  

Considerations

• Lenders may add some additional costs, such as application fees, titles search fees, appraisals and attorney fees, which can substantially add to the cost of the loan. Some lenders may also require a participation fee or annual membership fee that you will pay for the life of the loan. Consumers should be aware of variable or introductory interest rates that start low but could skyrocket over the lifetime of the loan.
  
  

Precautions

• Since these credit lines are based on home equity, a falling real estate market could lead to the freezing or reduction of a home equity line of credit, as it did with some banks in 2008. Beware of falling into the pattern of using the loan to pay of credit cards, and then using the available credit on the cards to make additional purchases. Be aware that defaulting on payment to the equity line can result in seizure of your home, since it serves as collateral. You will also need to pay the balance of your equity line off in the event that you sell your home.