by Kathleen Seligman
6/6/2006 You’ve likely often heard about home equity loans that allow you to use the equity built up in your home to consolidate debts or to pay for large unexpected expenses. Generic home equity loans, also known as “closed-end” loans, provide you with a lump sum that you can allocate however you wish. While this kind of home equity loan may seem simple and straightforward, it can also limit your options if you discover that you actually need more or less money than you received from your closed-end home equity loan.
Fortunately there is way you can take advantage of the equity in your home that offers more options and allows for additional flexibility: A home equity line of credit.
What Is A Home Equity Line Of Credit?
A home equity line of credit is different from a standard home equity loan in that it does not involve a fixed amount of borrowed money. Instead of taking out a fixed, lump sum, a home equity line of credit loan gives you access to a line of credit with an agreed-upon upper limit. This situation is similar to a credit card, and you’ll probably even receive an actual card or book of checks so you can easily access your home equity line of credit. While the philosophy behind a home equity line of credit has much in common with regular credit cards, home equity lines of credit often have much lower interest rates as well as larger available balances. And unlike a credit card, the interest you pay on a home equity line of credit is tax deductible.
Like a closed-end home equity loan, a home equity line of credit still draws upon the amount of equity you have in your home. Your available equity is equal to the difference between your home’s value and what you still owe on your original home loan. For example, if your house was worth $100,000 when you purchased it, and after your initial down payment, you borrowed $90,000, then you would have $10,000 in initial home equity. After several years of making your mortgage payments, you might have reduced your loan amount to $70,000 and would then have $30,000 in equity. As years go by, home and property values also normally increase, and any increased value is added to your available home equity.
How Do You Apply For A Home Equity Line Of Credit?
You can apply for a home equity line of credit at any mortgage company or lending agency, but your current mortgage holder may be the first place you want to investigate. Interested in keeping your business, your current lender might offer you home equity loan incentives such as a lower interest rate or fee deductions that other companies can’t match. Just as with any other financial decision, however, it’s best to shop around and collect multiple quotes. The Internet can be the perfect place to research lending agencies to find the one that is most suited to your circumstances.
You can also apply for a home equity line of credit on one of the many financial websites available online. If you do decide to apply for a home equity line of credit over the Internet, mortgage companies will want to know about your financial situation; they will also request information about your current mortgage as well as your property type, value, and location. You’ll also likely be asked how much money you are interested in borrowing.
One thing to keep in mind when deciding how much money you want to borrow for your home equity line of credit is that not all the money you take out will be available for your use. Expensive fees are often included in many loans, including home equity lines of credit. These charges can include appraisal fees, reporting fees, and closing costs that can drastically reduce the amount of money you can use for your own expenses.
Like closed-end home equity loans, a home equity line of credit can be ideal for people with poor credit or little credit history since the line of credit loan uses an individual’s home as collateral to back the loan. You need to be careful, however. Since a home equity line of credit uses your home to secure the loan, if you are unable to repay the money you borrow, then you can lose your home. Before you sign any agreement, be sure you understand all the fine print and are confident that you’ll be able to uphold your end of the bargain.
How Do You Repay A Home Equity Line Of Credit?
Unique to a home equity line of credit, this type of loan goes through two phases. The first phase of the home equity line of credit is the draw period. During the draw period of a home equity line of credit, you can take out as much money from the loan as you need to cover your expenses. As you use the borrowed money, you can choose to either pay only the interest that the borrowed funds accrue, or you can begin to pay off your principle. If you opt to pay back some of the money you borrowed, that amount is added back into your available line of credit. For instance, if the limit of your home equity line of credit was $20,000 and you initially used $8,000 for home improvements, then that would leave you with $12,000 left in your home equity line of credit. If you then paid $2,000 of the loan back, your available balance would increase to $14,000 from which you could continue to draw from. This back and forth pattern continues throughout the draw period as long as you stay below your credit limit.
The official repayment period is the second phase of your home equity line of credit and begins after the draw period expires. At this point, you can no longer borrow or draw on your home equity line of credit and must make monthly payments to fully repay your loan. This is where a home equity line of credit can get a little tricky. Whereas many other loans, including generic home equity loans, involve pre-determined monthly payments with fixed interest rates, a home equity line of credit can vary both in terms of interest rates and the amount you will pay each month. Both of these factors are dependent upon the amount of money you owe after the conclusion of the line of credit’s draw period.
A home equity line of credit can be a great way to make use of the money you have stored in your home. By taking out a home equity line of credit, you can borrow just the money you need while always keeping some in reserve in case ov unexpected expenses. Some financial analysts even recommend taking out a home equity line of credit before you find yourself strapped for cash. By applying for a home equity line of credit while you are financially stable you can use the line of credit as an insurance policy against future troubles.
So no matter if you need money for home improvements, a vacation in the tropics, or just as a monetary safety blanket, a home equity line of credit may be exactly what you’re looking for, and as long as you know the facts, you can borrow with confidence.
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