Home Equity Line of
Credit
A home equity line of credit is a form of revolving credit in
which your home serves as collateral. You can use your home
equity line of credit for major items such as education, home
improvements, new cars or medical bills, rather than for
day-to-day expenses.
The popularity of home equity line of credit is on the rise.
In a recent Homeloan2 survey, 68.3 percent of respondents who
had borrowed using home equity loan chose a home equity line of
credit over a one-time loan in the first quarter of 2004. This
is an increase from 37.5 percent in 1999.
With a home equity line of credit, you will be approved for a
specific amount of credit. This amount, also known as your
credit limit, is the maximum amount you can borrow at any one
time while you have the line of credit.
In determining your home equity line of credit limit, lenders
will consider your ability to repay by looking at your income,
debts and other financial obligations, and your credit history.
Once lenders determine your creditworthiness, they will set
the credit limit on a home equity line of credit by taking a
percentage - as much as 125 percent - of the appraised value of
your home and subtracting the balance you owe on the existing
mortgage. For example:
| Appraisal of home |
$100,000 |
| Percentage rate |
x125% |
| Percentage of appraised value |
$125,000 |
| Less mortgage debt |
-$40,000 |
| ------------------------------------------------------------ |
| Credit limit |
$85,000 |
Pay attention to the terms and rules
Once approved for your home equity line of credit, you typically
will be able to borrow up to your credit limit whenever you
want, using special checks or a credit card. However, there may
be rules about how you can use your home equity line of credit.
For example, you may be required to borrow a minimum amount,
such as $300, each time you draw on your credit line and to keep
a minimum amount outstanding. Or you may be required to take an
initial advance when you first set up your credit line.
Your home equity line of credit might feature a fixed period
of time during which you can borrow money - perhaps 10 years.
When this period is up, some lines allow you to renew. Others
call for payment in full of any outstanding balance or permit
you to repay over a fixed period - which again might be 10
years.
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