Home Equity Lines of Credit
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Many homeowners use their credit lines for major items such as education, home improvements, new cars or medical bills, rather than for day-to-day expenses.
The popularity of home equity lines of credit is on the rise. In a recent LendingTree survey, 68.3 percent of respondents who had borrowed using home equity loan chose a line of credit over a one-time loan in the first quarter of 2004. This is an increase from 37.5 percent in 1999.
With a home equity line, you will be approved for a specific amount of credit. This amount, also known as your credit limit, is the maximum amount you can borrow at any one time while you have the line of credit.
In determining your credit limit, lenders will consider your ability to repay by looking at your income, debts and other financial obligations, and your credit history.
Once lenders determine your creditworthiness, they will set the credit limit on a home equity line by taking a percentage - as much as 125 percent - of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:
Appraisal of home $100,000
Percentage rate x125%
Percentage of appraised value $125,000
Less mortgage debt -$40,000
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Credit limit $85,000
Pay attention to the terms and rules
Once approved for a home equity line, you typically will be able to borrow up to your credit limit whenever you want, using special checks or a credit card. However, there may be rules about how you can use the line. For example, you may be required to borrow a minimum amount, such as $300, each time you draw on the line and to keep a minimum amount outstanding. Or you may be required to take an initial advance when you first set up the line.
Home equity lines often feature a fixed period of time during which you can borrow money - perhaps 10 years. When this period is up, some lines allow you to renew. Others call for payment in full of any outstanding balance or permit you to repay over a fixed period - which again might be 10 years.
This information is adapted from "What You Should Know About Home Equity Lines of Credit" published by the Federal Reserve Board and the Office of Thrift Supervision.
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