About Home Equity Lines of Credit

A home equity line of credit is a secured loan using your home as the collateral. Home equity lines of credit are also revolving credit and are similar in this respect to a credit card. This means you get a credit line up to a maximum and can continue to borrow up to the maximum on an as needed basis and make monthly payments on the balance. This is ideal for those who can afford to use the lump sum to do projects or for other purposes and then pay down the balance each time they borrow.

How much can you borrow?

Home equity lines of credit generally cannot exceed 75% of your homes appraised value. The specific amount that can be borrowed is typically determined by taking 75% of the appraised value and subtracting the balance remaining on your mortgage, the remainder being the amount that will be available to be used as credit. So if your home is worth $100,000.00, then 75% would be equal to 75,000.00 and if you still owe $40,000.00 on your mortgage, you could be approved for up to a $35,000.00 line of credit. Keep in mind when using this line of credit that it must be paid back, either before or when you sell your home.

Other Terms and Important Information

Home equity line of credit interest rates are variable instead of fixed and are subject to change. Some lenders may allow you to convert to a fixed interest rate. In most cases the line of credit is only available for a specific amount of time, typically 10 years. The lender may offer you the chance to renew the line of credit when the period is up. In other cases, if the line of credit is not renewable then you may be required to pay back the balance of the loan at the end of the loan term. There may be some fees associated with a home equity line of credit. Since it is a property collateral loan there may be closing costs and other real estate fees associated with the loan. Some lenders may charge a transaction fee each time you withdraw money from the equity line of credit. Since an appraisal will be necessary you may be required to pay for the appraisal service.

Before taking out a home equity line of credit, make sure you are either not selling your home in the near future, or are confident that at the time of sale it will appraise at a value higher than the combined sum of your mortgage balance and the balance on the home equity line of credit. You should also be certain that you can afford to pay back the balance of the equity line of credit, meeting at least the minimum payments each month. A better plan would be to pay the balance down faster, taking advantage of the normally lower interest rates available to this type of loan. Another thing to look into is the differences between home equity loans vs home equity line of credit.