Home Equity Line of Credit (HELOC) Lawyers

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What Is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit, or HELOC, is a type of credit line wherein the borrower agrees to put the equity of their home up as collateral for an open credit line. The line of credit is available for a certain period of time, called the "draw period" (usually anywhere from 5-25 years). As the credit line is backed by the person’s home equity, it is similar to a home equity loan or a second mortgage.

Home equity lines of credit are typically only used for major expenses such as home improvements, educational fees, or insurance/medical bills. They can present alternative financing options for homeowners in the long run.

How Is a HELOC different from a Home Equity Loan?

A home equity loan is where the lender allows the borrower to take the entire amount of the money lent in one transaction, rather than a line of credit. In this case, the borrower still uses their home equity as collateral for the loan. However, the difference is in the way the money is distributed.

With a home equity loan, the entire loan amount is received at once, where as a credit line is subject to a limit that the person can use in a certain amount of time. Also, with a loan, you must repay the entire loan amount eventually; with a credit line, you only repay what you actually borrowed (not the amount of credit available).

Another difference with HELOCs and home equity loans is that the interest rates for HELOCS are subject to constant changing. This is because the interest rates of home equity credit lines are often based on formal indexes, market conditions, etc. In comparison, the interest rates of home equity loans are negotiated and agreed upon in advance before the loan is approved.

What Are some Legal Considerations Regarding HELOC’s?

Home equity lines of credit are often based on the borrower’s most expensive or valuable asset, i.e., their home. Therefore, persons opening a HELOC should be careful that they don’t overspend or abuse their credit line. Failure to repay HELOC debt can quickly lead to foreclosure situations.

Lastly, some HELOC lenders require the borrower to maintain a certain level of equity in their home, so as to avoid risk of default on the loan. In some cases, the lender may "freeze" or stop the credit line (i.e., stop access to the credit line). This can happen if it’s been determined that the home has become at risk for foreclosure. Alternatively, the lender might reduce the amount available or suspend the funds until a later date. These types of disputes can often require legal action to be fully resolved.

Do I need a Lawyer for Help with a Home Equity Line of Credit?

HELOCs are major credit arrangements and can sometimes affect the borrower’s homeownership rights if they’re not careful. You may wish to hire a qualified lawyer if you need help or advice with a home equity credit line. Your attorney can help you obtain a HELOC, and can also explain what your rights are under the contract agreement. Also, if you need to file a claim or a lawsuit, you may wish to hire a lawyer for legal representation.

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Last Modified: 12-22-2014 04:04 PM PST

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