Home equity line of credit loans are a form of credit using one's home as collateral. Unlike home equity loans in which a homeowner receives a one-time lump sum of money, home equity lines of credit involve an approved credit limit that homeowners borrow money from.

Why Get a Home Equity Line of Credit?

Home equity lines of credit are great for paying unexpected expenses. Many prefer this sort of credit because the interest rates are much lower than credit cards. Once approved for a specific amount, the money is available for withdrawing. Homeowners can borrow from their line of credit for home improvement, car repairs, weddings, and so forth.

How is Credit Limit Determined?

The credit limit on home equity lines of credit are based on many factors. These include the home's equity, homeowner's income, and debt ratio. Although a homeowner may have sufficient equity and satisfactory credit, a huge credit limit will not be granted to individuals with high revolving credit. Lenders must be confident in a homeowner's ability to repay the money borrowed.

The majority of home equity lines of credit are established for a fixed period. During this period, homeowners are permitted to withdraw or write checks on the line of credit. After the fix period expires, homeowners can re-apply for another line of credit. Before credit is approved, lenders re-examine homeowner's credit worthiness. Upon review of credit, a line of credit is either approved or denied. Moreover, a homeowner may receive a decreased or increased from the previous limit.

Some lenders have stipulations such as establishing a minimum withdrawal amount, or requiring homeowners to keep a small outstanding balance. Furthermore, some home equity lines of credit require that initial withdrawals are made when the account is established. Examples of minimum withdrawal amounts include $300 or $500.

Home equity lines of credit loans are ideal for homeowners who do not need a large lump sum of money. Home equity lines of credit are more flexible than home equity loans. With a home equity line of credit, homeowners have the option of interest-only payments and variable interest rates. However, homeowners concerned about possible high interest rates, and those preferring a predictable monthly payment might consider home equity loans a better alternative.

To view our list of recommended home equity loan companies, visit this page: Recommended Home Equity Lenders Online.

Carrie Reeder is the owner of ABC Loan Guide, an informational website about various types of loans.