Also known as a home equity line of credit, a property line of credit allows a homeowner to receive a credit line that is equal to all or part of the current equity in the home. This type of financial resource is often helpful when a homeowner wishes to make some improvements to the property, but is reluctant to take out a second mortgage or some other type of loan in order to finance those improvements. A property line of credit can also be used to retire medical bills or even to aid in funding a college education.
There are several advantages provided by a property line of credit that are not offered with a second mortgage. With a mortgage loan, the entire amount is advanced at one time, and interest charges accrue on that entire amount beginning immediately. In contrast, a property credit line offers the flexibility of utilizing only a portion of that credit at a time. This makes it possible to utilize the credit line incrementally, and retire the balance due every so often. The end result is that over the life of the intended project, the amount of interest paid is kept to a minimum.
Another benefit is that as the current open balance is retired, the homeowner once again has access to the entire property line of credit. For example, if the credit line is set at a maximum of $50,000 US dollars (USD) and the owner borrows $10,000 USD on that line, there is still $40,000 USD remaining. Once that $10,000 is paid off in full, the credit line returns to the maximum of $50,000 USD. With a loan where the entire amount is received up front, this is simply not possible without renegotiating the loan at some point.
There is also the possibility of refinancing the property line of credit over time. Assuming that the home that is used as collateral for the credit line appreciates in value, the lender is likely to be receptive to the refinance of the line of credit. This is because the increased value of the home helps to keep the risk assumed by the lender within a reasonable range, especially if the homeowner has a proven track record of managing the credit line responsibly.
A property line of credit does not have to use the primary residence as collateral. A homeowner who also owns vacation property or a home that is used on primarily on weekends can and often will establish the credit line based on the equity in that property. In this scenario, the credit line is typically referred to as a second property line of credit.