A second mortgage subordinate to the first mortgage on a borrower's residence.
A home equity line of credit (HELOC) is a second mortgage "subordinate to" the first mortgage on a borrower’s residence. A HELOC is made using the equity in one’s home as collateral.
Unlike a typical mortgage, a HELOC acts much like a credit card. The borrower is approved for a given amount (the line limit) but is not required to draw the full line at closing. Once the transaction has closed, the borrower can draw against the HELOC’s line limit as needed, often with a checkbook or card similar to a debit card. Borrowers can draw on their HELOC up to the line limit and are free to pay it down at any time.
The HELOC's monthly payments are not fixed; they are are adjusted monthly based on the current balance and rate. The rate is based on a pre-determined index (PRIME) which can fluctuate. HELOCs are often used as the second mortgage for 1st/2nd combo loans to avoid paying mortgage insurance or help borrowers reach a higher purchase price with as little as 5% down.