Is a Home Equity Line of Credit Right for You?

A home equity line of credit is like using the equity in your home as a credit card to do things like pay medical bills, complete improvements, go to college, or whatever you wish to use the money for. The amount of money you can borrow against your home depends on its market value, as well as how much you still owe on the mortgage and how much equity you have left after both those aspects are taken into consideration.

Money Involved

Homeowners are typically approved for a home equity line of credit that is only a percentage of the value of the home. A typical value is somewhere between 75 percent and 90 percent, depending on the homeowner’s credit report. If your home’s market value is $100,000, and they allow an 80 percent line of credit, you have $80,000 left of potential value to borrow against. However, if you still owe $40,000, you can only borrow against the remaining $40,000 equity. This line of credit is not unlike the maximum amount a person can charge on their credit card. And, just like a credit card, you aren’t allowed to go over that maximum amount.

Access the Line of Credit

In order to get access to your home equity line of credit, you usually use special checks and write them just as you would from a regular checking account. Some banks or lenders, however, issue an actual credit card to use for this purpose. Either way, you must pay back the amount you borrowed based on the terms of your line of credit repayment plan.

Payback Considerations

Some of these home equity line of credit loans expire after an agreed upon amount of time, while other’s can be renewed. If it can’t be renewed, you might have to pay the entire amount due at the end of that set period, so it’s best to be aware of both the terms of the line of credit and the period of time it lasts. Others require a percentage of whatever you owe on the line of credit to be paid every month just like a regular credit card.

Other factors to be considered is a possible minimum amount you have to borrow each time you access your home equity line of credit, or you are not allowed to access the entire amount. There are also fees for these types of accounts, such as closing costs, just like taking out a first mortgage. There could also be other costs, such as access fees, and maintenance fees over the life of the home equity line of credit. All of these things must be considered.

Interest Rates

Interest rates are another factor to take into consideration if you are thinking about taking out a line of credit against your home. Sometimes these are set rates, but other times they are variable rates, which means the payments could change drastically depending on the current state of interest rates.

A home equity line of credit can be a good way to access the equity in your home without the hassle of taking out a second mortgage or home equity loan, but there are still factors to be carefully considered to make sure it meets your needs.