 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. For
example,
|
Appraised
Value Of
Home |
$100,000 |
|
Percentage |
x 75% |
|
Percentage
of
appraised
value |
=
$75,000 |
|
Less
balance
owed on
mortgage |
-
$40,000 |
|
Potential
Credit |
$35,000 |
In determining
your actual credit
limit, the lender
will also consider
your ability to
repay, by looking at
your income, debts,
and other financial
obligations as well
as your credit
history.
Many home equity
plans set a fixed
period during which
you can borrow
money, such as 10
years. At the end of
this "draw period,"
you may be allowed
to renew the credit
line. If your plan
does not allow
renewals, you will
not be able to
borrow additional
money once the
period has ended.
Some plans may call
for payment in full
of any outstanding
balance at the end
of the period.
Others may allow
repayment over a
fixed period (the
"repayment period"),
for example, 10
years.
Once approved for a
home equity line of
credit, you will
most likely be able
to borrow up to your
credit limit
whenever you want.
Typically, you will
use special checks
to draw on your
line. Under some
plans, borrowers can
use a credit card or
other means to draw
on the line.
There may be
limitations on how
you use the line.
Some plans may
require you to
borrow a minimum
amount each time you
draw on the line
(for example, $300)
and to keep a
minimum amount
outstanding. Some
plans may also
require that you
take an initial
advance when the
line is set up.
|
