Features

• A HELOC is a revolving line of credit similar to that of a credit card. However, unlike a credit card, a HELOC is a secured line of credit that uses the equity in a home as collateral. Typically, a homeowner applies for a HELOC through a mortgage lender or bank. Also known as a second mortgage, HELOCs, like home equity loans, carry low variable interest rates.
  
  

Benefits

• Many people choose to apply for a home equity line of credit over a fixed-term loan because it allows the borrower to use only the money necessary at any given time. As he needs funds, the homeowner can essentially write a check to himself against the equity in his home, and will only pay back interest on the amount he uses.
  
  

Federal Taxes

• Parts of a HELOC may be tax deductible on federal income taxes if the homeowner itemizes his annual deductions. Like a mortgage, a homeowner can deduct interest paid on a HELOC or home equity loan, because both act as second mortgages. Note that only HELOCs and home loans that use the equity in primary residences qualify for the tax exemption. In other words, a taxpayer must pay taxes on interest paid on loans against investment properties or vacation homes.
  
  

Laws

• Depending on a HELOC applicant's state of residence, he may be able to obtain a home equity loan or line of credit. While some states, such as California, have no laws regulating who may borrow against the equity in a home, others may require a home equity loan applicant to have a specified amount of equity in the home before borrowing against it. For example, Texas law only allows a homeowner to borrow against equity in a home with a minimum of 20 percent equity. Furthermore, the loan can only be in an amount that doesn't exceed 80 percent of the home's market value.