How does a home equity line of credit work?

In many ways, a HELOC works much like a credit card. When you take out the loan, the lender sets a limit. Using lender-provided checks, or a credit or debit card tied to the line of credit, you can borrow an amount up to that predetermined limit.

Any amount that you borrow from the home equity line of credit is deducted from the amount available to you. As you pay it back, however, the amount becomes available to you again. Usually, a HELOC has a variable interest rate.

You only pay interest on the amount that you withdraw, and the minimum monthly payment is usually interest-only or a small percentage of the outstanding balance. However, by stretching out payments, you make the total cost of the loan much more.