Can someone spell out for me how these work? I've never done one.

GKARL did a good job. All I'm adding is some clarification.

HELOC vs. HEL

HELOC = Home Equity Line of Credit. Like a credit card, this is a revolving line of credit that you take as you need it and pay it off according to the terms, much like a credit card. The interest rate may be locked at first, but after the intro period will likely be variable. Typically, the line needs to be renewed either annually or at some other fixed period, at which point a new appraisal and/or updated condition of finances may be required to ensure you still have the capacity and the collateral is sufficient. Can be shut down at any time the lender feel like it.

HEL = Home Equity Loan. What some call a second mortgage. Fixed interest rate and fully amortized over 3 - 15 years. You receive the proceeds in a lump sum and pay it back in regular monthly installments that stay the same. No renewals or financial statement updates.

WMH,

Why don't you want a HELOC ? I have 2 of them and have used them for years and have had no problems with them. They are great for emergency cash when an emergency arises.

I have used them as a line of credit. Mine was for a fixed rate for 15 years and I had the option to increase the line as the property appreciated. Max line is generally 80% of FMV but can go to 90% depending on the ATR Rule, income and credit history.

We had the option to pay interest only or to pay any portion of the balance at anytime without penalty.

HELOC is considered and treated as a second mortgage or junior lien since the property is the collateral. If you refinance your home with a different lender the junior lien holder must agree to subordinate its lien to the first mortgage lender. Barring their agreement you cannot refi with a new lender.

Full appraisals are done if there have been major renovations otherwise they use either an AVM or RVM.

It is a by far the least expensive (2-3%) instrument for cash flow especially when compared to a business line of credit or business cc's.

I currently have a HELOC. My minimum payment was 1 percent of the loan amount each month (not interest only) and the interest rate is tied to prime (mine now is at 5.25 and variable). A year ago it was 4.0 percent, but now going up rather quickly. And there is often a floor (the lowest rate it will go) at least after a possible teaser rate. My floor was 4 percent.

I have one; got it years ago. Was very conservative and only took it out for $50K. Monthly payments are $135. I've probably purchased 8 houses with this little HELOC.

Roy, we don't need the cash, so don't want the encumbrance.

We can't afford anything that's on the market around here today. By the time the next crash comes we'll be too old to bother.

WMH,

To protect free and clear assets, you need good insurance and a great attorney.

WMH, don't fall into the trap of loading up a property with debt to make it less of a target for a law suit. That is ignorant advice given by people who want you to fatten their wallet using a technique that is not necessary.

As Roy said, be sure to have sufficient liability insurance. Combine that with following the law, and operate using proper business practices, and the odds of you ever being sued are very low, and the risk of loss that exceeds insurance dwindles to almost zero. I know you do these things already: this is for reassurance. You're okay!

The stats show more folks lose their home due to foreclosure (i.e. failing their debt obligations) than lose it to a lawsuit. Many states have laws protecting personal homes from seizure via a liability judgment. Check out the laws and review your liability insurance. A $2 million umbrella policy will most likely cost you less per year than interest on a mortgage, and it definitely carries less risk.