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Equity Line of Credit?
A Home Equity Line is a form of credit in which your home serves as the
collateral for the loan. You will be approved for a certain credit limit,
the maximum amount you can borrow at any time under the set plan. Many
lenders set your credit limit by taking a percentage of the value of your
home then subtracting the amount outstanding that you owe on the mortgage.
For example we'll say your house is worth $200,000 and the lender sets
the percentage for the credit limit at 75%, but you still owe $50,000
on the mortgage. This is how it would look
| Appraised
Value of Home $200,000 |
| Percentage
X 75 % |
| Percentage
of Appraised Value = $150,000 |
| Amount
Owed on Mortgage - $50,000 |
|
| Amount
of Credit = $100,000 |
There are other factors the lender takes into account when calculating
your credit limit such as your ability to repay. Lenders will look at
your income, debts, credit history, and other financial obligations.
How Can I Draw from My Credit Line?
Once approved you will most likely be able to draw on your credit limit
as much as you want. Typically, you will use special checks to draw from
your account. Under some plans, however, the borrower can use a credit
card or other means to draw from the line. Also, you may want to ask your
lender if there is a minimum or maximum withdrawal requirements.
Are There Up front Expenses?
In taking out a Home Equity Line of Credit there are some initial closing
costs. These include an application fee, title search, appraisal, attorney’s
fees, and points. You may want to negotiate with the lenders to see if
they will pay for some of the costs.
What About Interest Rates?
Interest rates differ from lender to lender; so shopping around for a
low interest rate can save you big bucks. You'll want to compare the annual
percentage rates (APR). However, be aware that advertised APRs are based
on interest alone. For a true comparison of what interest rate to grab,
take a look at other charges. Low interest rates may be tacked with extra
points, and the closing costs may be higher. The lowest APR may be more
expensive than a slightly higher one. Make sure you check what type of
interest rates the line has. Many home equity credit lines have variable
interest rates, which start out low but may increase.
What Are Risks of Taking out a Line of Credit
You will need to find out if there is a certain draw period. In paying
off your Home Equity Line of Credit many lenders expect one large final
(balloon) payment once the draw period has ended. Sense your home is used
as collateral this can be risky, especially if you don’t have the
money to repay the lender at that time. You may have to get an additional
loan to pay off the line of credit in order to save your house.
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