A Home Equity Line of Credit, or HELOC, loan allows a homeowner to borrow money against the equity in their home. With the recent economic downturn, many banks stopped issuing new HELOC loans or froze existing lines of credit. Now that housing prices have begun to stabilize, HELOC loans are rebounding. A HELOC is still a cheap way to borrow money and a much better way to obtain emergency cash than a credit card. Plus, the interest on a HELOC is typically tax deductible.

In the past, with a HELOC, a homeowner could borrow up to 100% of the equity held in their home even with bad credit. The money could be used for almost anything with few restrictions. Now the rules have changed. Loans that bring the total housing debt to more than 80% of the home’s value are rare, and credit scores play a role in how much you can actually borrow.

As easy as HELOCs are to use, they are equally as easy to abuse. Don’t max out your loan. Keep your overall debt payments below one-third of your take-home pay. Remember that HELOC rates are variable and will increase as the economy improves and housing prices increase. Don’t borrow more than you could handle if interest rates jump.

Here are some tips on how to use your loan the right way:

• Home improvements? Yes. HELOCs are a traditional way to fund major home improvements like a new roof. Avoid using HELOC funds for renovations that may not get their value back.
• Car loans? Yes, as long as you have solid plans to pay back the loan in a short time (no more than a few years). You generally can deduct the interest on a HELOC for up to $100,000 of non-home-related expenses.
• Small businesses? Maybe. Small business owners often use HELOC funds to smooth out economic bumps in their business income. However, this is only a good idea if the business is already a solid performer. A HELOC is no way to secure startup funding.
• Student loans? Not necessarily. Some government plans have tax-deductible interest already. A HELOC may be attractive if you have to seek private college funding.

Be sure to maintain your loan properly. Banks can freeze your line of credit at any time if property values drop. Use it regularly, even if you just take a small amount of money out each month and pay it right back. The bank will have less reason to cut you off if your loan is in use. Most importantly, remember that with a HELOC, your house is at risk if you fail to pay. Check with your financial advisor for more information on HELOC loans.