Home Equity Line Of Credit Primer
Home equity lines of credit are increasingly being offered to homeowners. When using the equity in your home through one of these typical HELOCs, you can often tap into a sizeable amount of money. This could be used in a variety of ways, such as home repairs, remodeling projects, or even investment purposes. A home equity plan may be the answer, but you may be better off with another type of loan. To decide what is best for you, you’ll first need to know what a home equity line of credit is, what to look for as far as terms and conditions, and what the costs will be. You’ll also want to know your options for repayment, and what other loan options could be utilized, such as a second mortgage, or complete refinance of your existing first mortgage.
First, let’s explain what a home equity line of credit is.
It is a form of revolving credit in which your home serves as the collateral. Since your home is likely to be your largest asset, you may wish to use the line of credit only for major items like education, home improvement, or medical bills as opposed to day to day expenses. When you take out a line of credit, you’ll be approved for a specific amount of credit. That is your credit limit, the maximum amount you can borrow at any one time. Your credit limit is usually determined by a percentage of your home’s appraised value, perhaps 75%. The balance owed on your mortgage is subtracted from the percentage of the appraised value, giving you the potential amount available for your line of credit. Your actual line of credit may vary depending on various factors the lender takes into consideration. They usually look for ability to repay, your total financial obligations and your credit history. There is often a fixed period of time during which you can draw from the credit line, say 10 years, for example. You may or may not be able to renew your credit line. Some plans may require payment in full at the end of the period. Others may allow a repayment period during which additional funds may not be able to be drawn. This could be 10 years, it just depends on your lenders rules in your contract. Once your line of credit is approved, however, you can usually withdraw as much as you want up to your credit limit. You may discover there is a minimum amount to draw. You may also be required to draw an initial advance when you set up the credit line. Read your credit agreement carefully, and ask questions upfront. Make sure you understand the conditions and terms.
Reading the agreement will usually satisfy most of your questions regarding the line of credit features, terms and conditions, but be sure to ask about anything you don’t understand. This will help you to decide if this loan product will suit your needs. However, to be sure it is the best answer for your situation, you’ll need to check out the costs associated with it and compare them with the costs and features of the other options out there. Here are the basic costs involved with a home equity line of credit (HELOC)
- Property appraisal fee
- Application fee
- Upfront charges-usually 1 or more points
- Closing costs-attorney fees, title charges for search, doc preparation and title insurance as well as taxes
- There might also be annual membership fees or maintenance fees or even transaction fees whenever you withdraw money from your line of credit.
Let’s look next at how you will repay the home equity loan.
There are various ways the line can be set up for repayment depending on the lender requirements. There is usually a minimum payment amount. However you can choose to pay more. Some lenders will give you payment options. Regardless of your payment choice, at the end of the loan period, you may end up with a balloon payment if you have only been paying the minimum payment each time. Also, if you have a variable interest rate, your monthly payments can change. If you decide to sell your home, you’ll have to pay off the line of credit.
There are other options. You might consider a second mortgage. It can give you the money you need while setting a fixed monthly payment amount. This often is more attractive to homeowners who are looking for a set amount of money to do home improvement, like say a kitchen remodel, or adding a pool. If you’re looking for cash to take care of emergency home repairs, as needed, you may prefer the home equity line for its flexibility. Obviously, there are many things to consider. Make sure you get the disclosure forms from your lender regarding your particular loan. Study them, and ask questions, if you’re unsure about anything. A home equity line can give you the flexibility to take care of life’s little emergencies, and give you peace of mind. It can also become a headache, if you’re not prepared. So take the time to do a little research. Make sure you are comfortable with your decision.
Leave a Reply