A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.
What is the difference between a home equity loan and a HELOC?
Both types of loans are made based on the equity in your home. Home equity loans
often referred to as a “second mortgage.” Usually have a low, fixed interest rate. When getting a home equity loan the borrower will receive a lump sum and payments are made over a predetermined period of time. HELOCs, on the other hand, is similar to a credit card: It allows the borrower to access a specific amount of credit on an as-needed basis. As you can take how much you need whenever you need it your minimum monthly payment will fluctuate. Just like any other line of credit, a HELOC will also have a variable interest rate.
Most home equity plans usually set a fixed period during which you can borrow money, such as 10 years. At the end of this period also known as “draw period,” they may allow you to renew the credit line.
There is a minimum amount due based on the outstanding balance while the draw period is active. When that period is over, the remaining balance is typically converted into amortizing payments at a fixed or variable rate of interest for repayment over a period of time similar to a home equity loan.
Usually, you will be writing special checks issued for the line of credit. However, some lenders allow you to use a credit card as well as other means to draw on the line.
Calculating home equity
In order to calculate the equity you’ve built up in your home, you should subtract the amount of money you owe on your mortgage from your home’s overall value.
Creditors Typically Look at the following factors when determining your actual credit limit, the lender will also take into consideration your ability to repay the loan both the principal and the interest
- Stable job with longevity.
- Stable place of living.
- Other financial obligations
- A history of timely payments on existing and previous loans or lines of credit.
- Available Income should be sufficient to pay current debts.
- Credit history.
These factors determine a consumer’s creditworthiness. The more stable and substantial a consumer’s credit history, the more creditworthy they are.
Depending on individual credit history, some lenders may allow the borrowing of 80- 85% of the appraised value of a home.
Qualifying for a home equity loan or HELOC is similar to qualifying for a conventional mortgage.
If you are looking for a credit, a home equity plan is one of the available options that might be right for you. Before making a decision, you should weigh carefully the costs of a home equity line against the benefits.
Costs of establishing and maintaining a home equity line
Many of the costs of setting up a home equity line of credit are similar to those you pay when you get a mortgage. For example:
- A fee for a property appraisal to estimate the value of your home;
- A non-refundable application
- Up-front charges, such as one or more “points” (one point equals 1 percent of the credit limit); and
- Closing costs, including fees for attorneys, title search, mortgage preparation and filing, property and title insurance, and taxes.
In addition, you might also have to pay certain fees during the plan period. This may include fees such as annual membership or maintenance fees. Possibly a transaction fee every time you draw on the credit line. Know what all the fees are.
A Home equity loan can help you make that equity work for you. This may be necessary when you need to make big purchases or cover large expenses.