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 a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills. With a home equity line, you will be approved for a specific amount of credit.
How much can I get?
Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage. For example:
Appraised Value of Home: $100,000
Percentage of Appraised Value: $75,000
Less Balance owed on mortgage: -$40,000
Potential line of credit: $35,000
How long do I have to use the money?
Once approved for a home equity line of credit, you will be able to borrow up to your credit limit whenever you want with a card that functions like a credit card. Many home equity plans set a fixed period during which you can borrow money, such as 5 or 15 years. At the end of this “draw period,” you may be allowed to renew the credit line.
What are the payback terms?
Typically they operate the same as a credit card. You might have a monthly bill, with the full amount outstanding due 15 or 30 years after the “draw period” has expired.