Home Equity Credit Line - is it for you?
A home equity credit line is available to homeowners who have equity available in their home. It can be thought of as a revolving line of credit in which the bank or lender requires you to use your house as collateral for the loan. The lender will qualify you for a maximum amount that you can borrow from your home equity credit line. To determine the amount of money you can have access to most lenders take a certain percentage of the appraised value of your home, for example 75% and then subtract from that number the amount that is still owed on your mortgage.
An Example of Establishing a Credit Line
If your house has an appraised value of $200,000 and the lender uses 75% of the appraised value that gives you $150,000. If you owe $50,000 on your mortgage you have $100,000 as the credit available to you from your home equity credit line. When the lender makes his final determination of how much to offer you for your line of credit he typically takes into consideration your capability to repay the loan. He will review your credit history, your income, your outstanding debts and other types of financial obligations that you have acquired.
A lot of the home equity credit line plans are good for a specific amount of time, perhaps ten years. After this period of time expires you might qualify to renew the line of credit with your lender. He will probably review your financial situation again to make sure you have not become an increased risk for not being able to pay back the loan. Some plans that are available do not allow renewals of the home equity credit line. Some lenders require that you pay off any outstanding balance when the time period for your credit line expires, while some lenders will give you a specific time period, perhaps ten years, to pay off the outstanding balance after the line of credit expires.
When reviewing the various plans that are available to you, make sure you read all the details of the plans including the annual percentage rate (APR) and any fees that are required to be paid to establish your home equity line of credit. When comparing the plans offered by the various lenders make sure you total up all the fees and not just compare the annual percentage rates that they offer.
Variable Interest Rates and Your Credit Line
Home equity credit lines usually come with a variable interest rate which is set by an index, such as the prime interest rate. Your rate for borrowing will fluctuate along with the index that is being utilized for your line of credit. Most plans determine your interest rate by the index rate plus a margin that is typically two percentage points. By law the variable rate credit lines have to establish a maximum concerning the amount your interest rate can go up during the life of the line of credit. Some plans also establish how much your inertest rate can decrease due to a falling interest rate index. There are plenty of banks and lenders who offer home equity credit lines so shop around before you decide which plan to take.
