Home Equity Line of Credit  

Due to the continuous rising of market value of homes today, more and more lenders are offering home equity line of credit. By using the equity in your home, you may qualify for a considerable amount of credit which is available for use however and whenever you please at an interesting low interest rate. It sounds interesting, isn’t it? But, what does home equity line of credit really mean? If your home is at risk, you might want to know what it is and what you are going into before making a big decision in your life.

Home equity line of credit is actually the same to a credit card in which you have an upper spending limit against which you can draw as needed. But the difference is that it is secured by the equity in your home. In addition, under the tax law and depending on your specific situation, you may be allowed to deduct the interest because the debt is secured by your own home.

Since the home is likely to be your largest asset, many homeowners use their home equity line of credit in for major items such as home renovations or improvements, education, or medical bills and not for usual expenses like shopping, grocery, or dining.

With a home equity line of credit, you will be approved for a specific amount of credit, which is your credit limit or the maximum amount you may borrow. A lot of lenders set their credit limit on a home equity line of credit by taking a percentage, for example 80 %, of your home’s appraised value minus the balance to be paid on the existing mortgage. To compute:

Your home’s appraised value                                      $100, 000

Percentage                                                             x              75 %

Percentage of appraised value                                                $ 80, 000

Minus the balance owed on mortgage                        $ 40, 000

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Your potential credit                                                   $ 40, 000

To determine your actual credit limit, the lender will also consider your ability to repay, by looking at your income, debts, and other financial obligations as well as your credit history.

A home equity line of credit set a fixed period of time at some point in which you can borrow money, for instance 10 years. At the end of the grace period set by the lenders, you may be allowed to the credit line. If your plan does not allow renewals, you can’t borrow additional money as soon as the period has ended.

Once approved for a home equity line of credit, it’s likely that you will be able to borrow up to your credit limit whenever you want it. Usually, you will use special checks to draw on your line. In some other plans, you may use a credit card or other ways to draw on the line. There maybe limitations in how to use the line, like you may require to borrow a minimum amount each time you draw the line one (let’s say, $ 300) and keep a minimum amount outstanding. Some plans may also require you to have an initial advance once the line is set up.

If you are considering applying for a home equity line of credit, look for the plan that best meets your specific needs. Make sure to read carefully the credit agreement and look into the terms and conditions of various plans, including the annual percentage rate (APR) and the cost of establishing the plan. The APR for home equity line of credit is based on the interest rate alone and will not reflect the closing costs and other charges and fees. For these reasons, make sure to compare all the costs, as well as the APRs, among the lenders.