A home equity line of credit is a variable-rate, revolving line of credit based on the available equity in your home. It provides you with flexible
financing - you can drawdown on the money that you need when you need it. A 125% equity line of credit means that you can borrow at any one time up
to 125% of your home's value, minus your first mortgage.
Let's say you bought your home for $100,000 with a down payment of $20,000. You then took a first mortgage for $80,000. Over the next few years, you've paid $10,000 toward the principal. At the same time, market demand on homes in your area has pushed up the price on your property, and your home is now worth $120,000. With a 125% home equity line of credit, and considering that all of your other risk criteria are accounted for and that you meet the minimum debt-to-income ratio, you are eligible for a credit line of up to $80,000 - your current property value times 125% minus the amount still owed on the mortgage of $70,000. You can drawdown on this amount at any time, albeit at any one time, the amount can not exceed the credit line. Once you have repaid the used funds, you can borrow again. Many home equity plans set a fixed period during which you can borrow money.
A home equity line of credit provides you with flexible financing. Many people pay off other existing personal debt, higher interest rates first mortgage, or simply use the proceeds to make major purchases in order to avail the lower financing and tax incentive. Make sure you borrow what you can afford. Failure to repay the amounts you've borrowed, plus interest, could mean the loss of your home.