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Home Equity Line of Credit

What is a home equity line of credit?

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.

How much I can borrow with Home Equity Line of Credit?
The maximum amount of money that can be borrowed as home equity line of credit is determined by various variables, including credit history, ability to pay, and the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the appraised value of the home, less any liens, although there are lenders that will go above 100% when doing over-equity lines of credit.

Many home equity line of credit 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. 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, 15 years.

What is the difference?: Home Equity Line of Credit vs. Home Equity Loan.

Home Equity Lines of Credit (HELOC) is a form of revolving credit similar to a credit card, while Home equity loans (HEL) works much like regular second mortgage. It allows you to draw funds, up to a predetermined limit, whenever you need money. With a home equity loan, you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period.
 

A home equity loan is a type of loan in which the borrower uses the equity in his home as collateral. Home equity loans work much like first mortgages. These loans are sometimes useful for families to help finance major home repairs, medical bills or college educations.

 

How much I can borrow with Home Equity Line of Credit?
The maximum amount of money that can be borrowed as home equity line of credit is determined by various variables, including credit history, ability to pay, and the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the appraised value of the home, less any liens, although there are lenders that will go above 100% when doing over-equity lines of credit.
 



Comparison Chart

 
Home Equity Loans (HEL)
Home Equity Line of Credit (HELOC)

   What you are getting?

A fixed amount of money, up to 100 percent of your equity in your home (its value minus your first mortgage debt and other debts). Some lenders will allow you to borrow up to 125 percent of the value of your home.

Revolving credit, with a specific credit limit of up to 100 percent of the value of your home value minus all debts against it. Some lenders may  allow you to borrow up to 125 percent of the value of your home.

  Qualification

You typically need to provide proof of your income, home ownership, your mortgage and how much equity you have in your home. An appraisal is usually required.

You need to provide proof of your income and home ownership, and proof that at least 20 percent of the value of your home is paid off. An appraisal is usually required..

   Terms

 Any where from one year to 30 year.

Usually, you have a 10- to 20-year period when you can draw funds from "line of credit", after which you have a fixed period to pay off the outstanding balance plus interest.

   Payments

Fixed payments of interest and principal over a fixed period of time.

Minimum payments each month; eventually you have to repay the entire sum borrowed plus interest.

   Costs and fees

 There will be closing cost similar but lower than for a first mortgage

Usually no closing costs, but may have an annual fee.

How you receive the funds?

You receive one time lump sum.

You draw funds as needed, using special checks or a credit card.

Interest Rate

A fixed or adjustable interest rate.

The prime interest rate plus a margin (which can vary from one lender to another)

 

  
 
 

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