Home Equity Line of Credit

A home equity line of credit is loosely defined as an amount of credit that a lender will provide using the borrower’s home as collateral. Most lending institutions set the figures for a home equity line of credit by the homes appraisal value of $200,000 on the home with $170,000 still owed on the mortgage would leave $30,000 in equity in the property. Most lending institutions will provide the borrower with 75% or 80% of the equity amount available as a home equity line of credit.

Lending institutions will also take into account the borrower’s capability to repay on the loan amount. The factors used to determine this are the borrower’s credit score, debts and income.

The credit line on a home equity line of credit usually has a set amount of time in which it must be used, usually around 10 years. If the time period in which the line of credit lapses, the borrower must renew the home equity line of credit with the lender if they wish to keep using that line of credit. There are home equity lines of credit that do not let the homeowner renew their line of credit. Some lenders have requirements that the full balance must be paid when the 10 year time period has lapsed. Sometimes there is a repayment period set for the existing balance on that line of credit.

There are often many options available for money withdrawal on a home equity line of credit. Lenders will sometimes give homeowners debit cards, credit cards or special checks to access the monies available to them according to their available credit amounts. Different lenders have different practices. Some will allow a borrower to borrow the minimum amount each time they want to draw on their line of credit. Others may insist that a minimum outstanding balance is kept.

There are often costs associated with processing and setting up a home equity line of credit. Application fees, appraisal fees, points and closing fees. Closing fees include property and title insurance and taxes, filing fees, attorney’s fees, mortgage preparation fees, and title search fees.

Borrowers should have a knowledge of what the current annual percentage rate is for the home equity line of credit, often they are usually variable rates. The annual percentage rae is based on an index. The rate could also have a base determined by the U.S. Treasury Bill rate. The annual percentage rate will often change when the index changes. Points of percentage are also fastened to the rate. If the rate is x percent, the annual percentage rate on the home equity line of credit is x percent plus y percentage points.

See more:

How much house can I afford?

FTC – Home Equity Credit Lines

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