What is a Home Equity Line of Credit?

A home equity line of credit allows you to borrow money using your home as collateral. To be eligible for a home equity line of credit you actually have to possess equity in your home. Let’s say you buy a house for $300,000; you make a down payment of $40,000 and borrow the remaining $260,000. The day you purchase your home your equity is the same as your down payment, $40,000. Fast forward five years, your house has appreciated to an appraised value of $500,000 and you have paid down your mortgage debt $25,000 to $235,000. Still with me? Your equity at this point in time is now $500,000 (current appraised house value) minus $235,000 (existing mortgage debt) or $265,000. A home equity line of credit is getting access to that equity so it can be used; most lenders will let you borrow up to 85 percent of the equity value in your home.

Home Equity Line of Credit: The Need to Know

There are many different home equity line of credit programs available in the market. Each program has its own intricacies and must be fully investigated. Most home equity loans that give lines of credit accessible over a time period come with variable interest rates, some come with low introductory rates that can jump up after a set time period, and few come with fixed rates like traditional 2nds. As mentioned above, various home equity loans are structured differently, many have one-time upfront fees, some have closing costs or a balloon payment at loan end, and others have continuing annual fees.

Questions you want to ask a Loan Professional

Don’t feel overwhelmed about the complexity of a home equity line of credit program. With all loan professionals they have to explain to you all facets of any particular loan as required subject to the Truth in Lending Act.

• What is the length of the home equity loan and is there a fixed draw period that specifies when you can take out money?
• What are the maximum and minimum withdraws when you open a new home equity line of credit?
• What fees accompany the home equity line of credit and how are they structured?
• What are the repayment terms during and or at the end of your loan?
• What is the Annual Percentage Rate? (the cost of credit on a yearly basis)
• If you are going with a variable rate loan; what is the periodic cap and lifetime cap? They are the limits that specify the amount the interest rate can change during one period and the entire life of the loan respectively.

With a home equity line of credit it really pays to do your homework. Compare home equity loan rates today and do what it takes to find a great deal.

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