What is a Home Equity Line of Credit?
• A. Also known as a HELOC, a home equity line of credit is a type of revolving credit for which your home is pledged as collateral. The interest rate and payments are variable. The term is defined by a draw period and a repayment period. The payment each month is based upon the outstanding balance owed. As payments are applied to principal, your available credit increases accordingly.
This is a secured, interest-only, variable-rate loan that allows you to borrow against the available equity in your primary residence. A Home Equity Line of Credit (HELOC) can be used for expenses such as home improvements, education, a vacation or even a down payment for a second home. Checks are available if you wish to write a check against your line of credit.
A home equity line of credit amounts to an arrangement where a borrower’s home acts as protection/collateral for a loan. In essence, your home becomes a source of credit to finance home improvement projects, education, retirement programs, and other big ticket items. Generally, your bank or lending institution will allow you to draw upon a fixed amount of equity. This number is based on a percentage of the appraised value of your property minus the rest of the money you owe on your mortgage. For instance, let’s say that your home is worth around $500,000, and your equity line of credit allows you to access 50 percent of that value. Does that mean you can take out $250,000 worth of credit against your home? Not quite — you have to subtract out how much you have left to pay on your house. For instance, let’s say that you’ve only put down $200,000.
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit–your credit limit, the maximum amount you may borrow at any one time under the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.
A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit-your credit limit-meaning the maximum amount you can borrow at any one time while you have the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage.
Related Questions
- Can consolidating debt through a new, refinanced mortgage, cash-out refinance, home equity loan or home equity line of credit (HELOC) help me cut my monthly expenses?
- What are the chances of interest rates being reduced to allow a refinance on an existing VA mortgage?
- What is a Home Equity Line of Credit?
