What Is A Home Equity Line of Credit?

[May 16, 2008.]

 

Home owners have several options open to them when they find themselves in need of cash. Since the home is one of the greatest assets anyone will ever have these options often involve using the home as collateral for the loan. These loans come in different forms and are called by different names depending on the area and location.

One of these loans is the Home Equity Line of Credit which is quickly replacing mortgages as a way of securing a loan. The reason for this shift is that Home Equity Line of Credit looks a bit better on Credit Reports then mortgages. Home Equity Lines of Credit work much in the same way as home mortgages or deeds of trust. In both cases the home owner takes a loan out from a bank or other institution which places a lien on the property. The only real difference is that the home owner does not get the total sum of the loan upfront. Instead, the home owner will be able to take out increments of the total loan amount during the term of the loan. Many compare this with a credit card expect that the home has a lien placed upon it and if you are unable to pay the loan back then the property will undergo foreclosure.

To determine your credit limit for the Home Equity Line of Credit the lender will look at your financial history including your credit report and rating. They will also review your income, assets, and whatever debt you may already have. When approved, you and the lender will get together to draw up a plan which will include what the credit limit will be and how long the draw period will be. The interest rate on the Home Equity Line of Credit is often based on the Annual Percentage Rate and is usually not fixed so it is pretty much guaranteed to go up on occasion. There will be limitations and restrictions placed on the line of credit such as when and how much you can draw on it so be sure to understand the terms and conditions fully.

Reasons for taking a Home Equity Line of Credit are similar to the reasons why people take out mortgages. The most popular reason is emergencies such as sudden illnesses or home repairs as a result from floods or other natural disasters. Other reasons include car repairs, educational purposes, weddings, and even vacations.

Repayment of the Home Equity Line of Credit can take place during the life of the loan or in one lump sum at the end of the period. During the life of the loan it is possible that you will only be required to pay the interest every month. While this may have short term benefits you must remember that at the end you are responsible for paying off the entire loan. Take this into consideration as you think about whether or not you should use a line of credit to pay for expenses. You will also need to be aware that the interest rates are variable and will change during the life of the loan this will mean an increase in the monthly payments. If you are unable to pay the loan off you will loose your home.

Home Equity Line of Credit is a great option for anyone that may not need a huge sum of money upfront or that would rather not have the stigma of a mortgage on their credit report. Whatever the case you will need to keep up with the monthly payments just like with any other loan or you run the risk of loosing your home.