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Home Loan & Home Mortgage Article Series
Understanding a Home Equity Line Of Credit
A
home equity line of credit is defined as a process of revolving
your credit and using your home as collateral. Since a home is one of the largest assets of consumers, many
homeowners make use of their credit line for major purposes
such as home improvements, education, medical bills and paying
off other debts.
Once you are approved with a home equity line of credit program,
you will be assigned a particular credit limit. The majority
of lenders determine the credit limit on a specific home equity
line by establishing a percentage of your home’s appraised
value and subtracting the amount of balance owed for your existing
current mortgage.
There
are also additional factors that will determine the value
of your credit limit. The lenders will consider your
capability to pay by analyzing your income, other debts, credit
history and financial responsibilities.
Almost
all equity line plans are set in a fixed period. During
this period, such as five to ten years, you are eligible to
borrow money as long as it is within your credit limit. When
the said period ends, you can renew the home equity line
of credit. However, some plans do not offer renewals. Once
the period has ended you are not eligible to borrow any additional
money. Other lenders allow repayment for an agreed fixed period.
Usually,
the draw period is set at five to ten years with a repayment
period of ten to fifteen years. However, each
lender can set its own draw and repayment periods. The most
common draw periods are nine years and six months. The most
common repayment period is for twenty years.
Once you have been approved for a home equity line of credit,
you will have the benefit of borrowing up to your limit anytime.
The most common among the line payment methods are special
checks. Some credit plans allow you to use credit cards or
other methods to draw on the line of credit.
Some
plans set limitations on the usage of the home equity line
of credit. Most plans allow you to get the minimum amount
for each transaction and maintain a minimum outstanding balance.
Some plans also oblige you to draw up your first advance as
soon as the line of credit is set up.
Of
course, just like any other investment, there
are costs in establishing and maintaining your home equity
line of credit. First, there
can be fees for property appraisals to calculate approximately
your home value. Second, most lenders require
an application fee that generally cannot be refunded if your
application is denied.
In addition, you will be paying closing costs such as title
search, attorney fees, title and property insurance, additional
taxes, and preparation and filing of mortgages. Once you have
received your home equity line of credit, there may also be
other fees during the entire plan period. These include maintenance
or membership fees and transaction fees during every withdrawal.
Although
you will end up spending hundreds
of dollars in fees just to maintain the plan with your home
as collateral, your annual percentage rate will be much
lower than any other type of credit. This interest
could allow you to offset all the costs of maintaining and
establishing the home equity line of credit. Sometimes, the
lenders waive a little or even most of the costs for closing
the deal.
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