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More
and more lenders are offering home equity
lines of credit. By using the equity in your
home, you may qualify for a sizable amount
of credit, available for use when and how
you please, at an interest rate that is relatively
low. Furthermore, under the tax law (depending
on your particular situation) you may be allowed
to deduct the interest because the debt is
secured by your home.
If you are
in the market for credit, a home equity
loan may be right for you, or perhaps another
form of credit would be better. Before making
this decision, you should weigh carefully
the costs of a home equity line against
the benefits. Shop for the credit terms
that best meet your borrowing needs without
posing undue financial risk. Remember--failure
to repay the line could mean the loss of
your home.
What is a
home equity line of credit?
A home equity
line 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.
With a home
equity line, you will be approved for a
specific amount of credit--your credit limit.
The credit limit is the maximum amount you
can borrow at any one time while you have
the loan.
Many lenders
set the credit limit on a home equity line
by taking a percentage (say, 75 percent)
of the appraised value of the home and subtracting
the balance owed on the existing mortgage.
For example:
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Appraisal of home
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$100,000
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Percentage
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x75%
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Percentage of appraised value
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$75,000
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Less mortgage debt
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-$40,000
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Potential credit line
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$35,000
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In determining
your actual credit line, the lender also
will consider your ability to repay, by
looking at your income, debts, and other
financial obligations, as well as your credit
history.
Home equity
plans often set a fixed time during which
you can borrow money, such as ten years.
When this period is up, the plan may allow
you to renew the credit line. But in a plan
that does not allow renewals, you will not
be able to borrow additional money once
the time has expired. Some plans may call
for payment in full of any outstanding balance.
Others may permit you to repay over a fixed
time, for example ten years.
Once approved
for your home equity loan, you should be
able to borrow up to your credit limit whenever
you wish. Typically, you will be able to
draw on your line by using special checks.
Using a special
credit card or other means, some plans allow
borrowers to make purchases, in addition
to borrowing money. However, there may be
limitations on how you use the line. Some
plans may require you to borrow a minimum
amount each time you draw on the line (for
example, $300) and to keep a minimum amount
outstanding. Some lenders may require that
you take an initial advance when you first
set up the line.
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