Home Equity Line of Credit

Putting your house to work for you in times of need

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.

Picking the best option

You will find most home equity line of credit loans come with variable interest rates; some come with attractive low introductory rates, and a few come with fixed rates. You also may find most home equity line of credit loans have large one-time up-front fees, others have closing costs, and some have continuing costs, such as annual fees. You can find loans with large balloon payments at the end of the loan, and others with no balloons but with higher monthly payments.

Deciding your eligibility

In determining your home equity line of credit limit, lenders will consider your ability to repay by looking at the following points

Your income

Any debts you may have

Other financial obligations

Your credit history

Once they have verified your creditworthiness, they will set the credit limit on a home equity line of credit by taking a percentage of the appraised value of your home and subtracting the balance you owe on the existing mortgage.

The amount you can borrow

Depending on your income, credit rating, and the amount of your outstanding debt, home equity lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage.

Repayment issues

As you pay back the loan, your payments may change if your credit line has a variable interest rate. So make it a point to find out how often and how much your payments can change. You also will want to know whether you are paying back both principal and interest, or interest only. In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment.

Evaluating the pros and cons

If you need to borrow money for some major unforeseen expense, home equity lines may be a useful source of credit. They may offer large amounts of cash at relatively low interest rates, and also provide you with certain tax advantages unavailable with other kinds of loans.

At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. And, if you plan to sell your home, most loans require you to pay off your credit line at that time.

More information on home equity loans