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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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