Line of Credit

Line of credit is a flexible borrowing arrangement in which a lender pre-approves a maximum borrowing limit and allows the borrower to draw funds, repay, and re-draw as needed — up to that limit — without reapplying for a new loan each time. Unlike an installment loan that disburses a fixed lump sum at closing, a line of credit is revolving, meaning the available balance replenishes as the borrower makes payments.

How a Line of Credit Works

The basic mechanics of a line of credit are straightforward:

1. Approval — the lender evaluates the borrower's creditworthiness and, if applicable, the value of the collateral being pledged. A maximum credit limit is established.
2. Draw period — the borrower can access funds at any time up to the approved limit. Interest accrues only on the outstanding drawn balance, not on the total credit limit.
3. Repayment — the borrower makes payments (often interest-only during the draw period) and the repaid amount becomes available to borrow again.
4. Conversion or maturity — at the end of the draw period, the outstanding balance either converts to a fully amortizing repayment schedule or must be paid in full, depending on the terms.

Types of Lines of Credit

Secured Lines of Credit

A secured line of credit is backed by collateral — an asset the lender can claim if the borrower defaults. The most common form in real estate is the HELOC (home equity line of credit), where the borrower's home equity secures the credit line. Secured lines typically offer lower interest rates and higher limits because the lender's risk is reduced by the collateral.

Unsecured Lines of Credit

An unsecured line of credit has no collateral backing. Personal and business credit cards are the most familiar examples. Interest rates are higher because the lender has no asset to seize in the event of default. Unsecured lines are generally not encountered in the secondary mortgage note market.

Lines of Credit in the Note Investing Context

Lines of credit intersect with mortgage note investing in two distinct ways:

1. As an Asset Type (HELOCs on Data Tapes)

When a note investor reviews a data tape of non-performing loans, some of the assets may be defaulted HELOCs — home equity lines of credit that were originated as junior liens. These are lines of credit that borrowers drew against and then stopped repaying. For due diligence and resolution purposes, see the full HELOC entry.

2. As a Financing Tool for Fund Operators

Note fund managers use institutional lines of credit to leverage their portfolios and reduce their blended cost of capital. A bank or credit union extends a revolving credit facility against the fund's portfolio of performing loans, allowing the fund manager to draw capital for new acquisitions, repay as loans resolve, and re-draw for the next batch of purchases.

Key characteristics of portfolio credit lines for note investors:

• Borrowing base — the bank evaluates the fund's assets and assigns a borrowing limit based on the value and quality of the portfolio, not a fixed dollar amount
• Advance rates — the percentage of portfolio value the bank will lend against (typically 60–70% for performing first and second liens)
• Collateral custody — the bank requires that original loan documents be held by a third-party custodian under a bailee letter arrangement
• GAAP compliance — larger facilities often require the fund to maintain audited financial statements prepared under Generally Accepted Accounting Principles
• Cost advantage — institutional credit lines carry single-digit interest rates, significantly cheaper than the preferred returns or profit shares paid to private equity investors

Credit Line vs. Debt Facility

When Lines of Credit Matter for Individual Investors

Most individual note investors do not have the portfolio scale to secure institutional credit lines. However, understanding how lines of credit work is still important for several reasons:

• Evaluating HELOC assets — knowing the draw-period and repayment-period mechanics of a line of credit helps you assess why a borrower defaulted and what resolution strategies are viable
• Understanding fund structures — if you invest passively in a note fund, the fund's use of credit facilities directly affects your returns and the fund's risk profile
• Scaling toward institutional capital — as your portfolio grows, the ability to secure a credit line against your performing assets is a key milestone in building a sustainable note business