Understanding Home Equity Line of Credit
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.
With a home equity line, you will be approved for a specific amount of credit. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage. For example:
Appraised value of home $100,000
Percentage x 75%
Percentage of appraised value = $ 75,000
Less balance owed on mortgage – $ 40,000
Potential line of credit $ 35,000
In determining your actual credit limit, the lender will also consider your ability to repay the loan (principal and interest) by looking at your income, debts, and other financial obligations as well as your credit history.
Many home equity plans set a fixed period during which you can borrow money, such as 10 years. At the end of this “draw period,” you may be allowed to renew the credit line. If your plot does not allow renewals, you will not be able to borrow additional money once the period has finished. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period (the “repayment period”), for example, 10 years.
Once approved for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Typically, you will use special checks to draw on your line. Under some plans, borrowers can use a credit card or other means to draw on the line.
There may be other limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) or keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up.
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Tags: Home Equity, Home Equity, home equity line of credit, home equity loan rates, home equity loans, lenders, LoansTags: Home Equity, home equity line of credit, home equity loan rates, home equity loans, lenders
[...] A home equity line of credit (HELOC) is simple to establish, requires very small red tape, and generally carries no monthly fees, except for payments made on the money you borrow. Best of all, when you don’t need to borrow, the credit line just sits there waiting for you to use it. What’s more, you don’t have to pay any interest until you really withdraw the funds. [...]