With the dramatic rise in housing prices in California in the last few years, many borrowers are turning to Home Equity Lines of Credit to tap into all that built up equity in the property.

Home Equity Lines of Credit or Heloc's for short, are just what they sound like, lines of credit.  Let's say you have a Heloc for $100,000 and you draw on $30,000 of it, you still have $70,000 to draw upon.  You only pay interest on what you draw, in this case $30,000.  If you draw more, then you will pay interest on the final balance.

Remember, the interest on a Heloc is tax deductible.  So a lot of people are using Heloc's to pay off high interest rate credit cards, student loans, debt consolidation, etc.  Many home owners are using Helocs to buy additional properties, such as for investment purposes.  Now the other thing to remember, you will one day have to start paying the loan off, or principal reduction.

How does a Heloc work?

Once you have qualified for your Heloc, you will receive a series of 'checks' in the mail which allows you to start drawing on the line of credit.

Helocs are a recorded instrument, so they will appear on your credit report and title, even if you never draw one penny!

Most Helocs are generally for 25 years, the 1st ten years, the borrower is required to make an interest only payment, and the subsequent 15 years interest and principal payments will have to be made together.

How does the lender calculate the rate on my Heloc?

Most of the Helocs that I deal with are tied to an index called "Prime."  Prime is published in the Wall Street Journal, and essentially it is the best rate that lenders offer to their best customers.

Depending on your credit score and loan amount, most Helocs also are tied to a Margin, which never changes.  So let's say that your Margin is 1% and prime is currently at 4.25%, your effective rate is 1% + 4.25% = 5.25%.  Helocs adjust on a montly basis, so if prime changes, then so will your interest rate.

So, based on a $100,000 Heloc, and let's say that you have drawn $30,000, the interest payment:

($30,000 x 5.25%)/12 = $131.25