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What is a Home Equity Line of Credit?
More and more lenders are offering home equity
lines of credit. By using the equity in your home, you may
qualify for a sizable amount of credit, available for use when
and how you please, at an interest rate that is relatively low.
Furthermore, under the tax law (depending on your particular
situation) you may be allowed to deduct the interest because the
debt is secured by your home.
If you are in the market for credit, a home
equity loan may be right for you, or perhaps another form of
credit would be better. Before making this decision, you should
weigh carefully the costs of a home equity line against the
benefits. Shop for the credit terms that best meet your
borrowing needs without posing undue financial risk.
Remember--failure to repay the line could mean the loss of your
home.
What is a home equity line of credit?
A home equity line is a form of revolving credit
in which your home serves as collateral. Because the home is
likely to be a consumer's largest asset, many homeowners use
their credit lines only for major items such as education, home
improvements, or medical bills and not for day-to-day expenses.
With a home equity line, you will be approved
for a specific amount of credit--your credit limit. The credit
limit is the maximum amount you can borrow at any one time while
you have the loan.
Many lenders set the credit limit on a home
equity line by taking a percentage (say, 75 percent) of the
appraised value of the home and subtracting the balance owed on
the existing mortgage. For example:
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Appraisal of home
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$100,000
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Percentage
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x75%
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Percentage of appraised value
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$75,000
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Less mortgage debt
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-$40,000
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Potential credit line
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$35,000
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In determining your actual credit line, the
lender also will consider your ability to repay, by looking at
your income, debts, and other financial obligations, as well as
your credit history.
Home equity plans often set a fixed time during
which you can borrow money, such as ten years. When this period
is up, the plan may allow you to renew the credit line. But in a
plan that does not allow renewals, you will not be able to
borrow additional money once the time has expired. Some plans
may call for payment in full of any outstanding balance. Others
may permit you to repay over a fixed time, for example ten
years.
Once approved for your home equity loan, you
should be able to borrow up to your credit limit whenever you
wish. Typically, you will be able to draw on your line by using
special checks.
Using a special credit card or other means, some
plans allow borrowers to make purchases, in addition to
borrowing money. However, there may be 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) and to
keep a minimum amount outstanding. Some lenders may require that
you take an initial advance when you first set up the line. |
