What Is A Home Equity Line of Credit and How Does It Work

What is a home equity line of credit and how does it work? Applying for a home equity line of credit requires the borrower to know what is a home equity line of credit and how does it work.

It is one way of using your home as a source of funds by borrowing against the equity you have in your home. This is usually a more cost-effective borrowing plan than using credit cards because the interest is lower. The interest is also tax deductible.

Establishing a home equity line of credit is accomplished by applying at a bank or credit union. The process of establishing your home’s eligibility for a home equity line of credit requires that an appraisal be made of the current value of your home.

A bank will generally establish a line of credit equal to 75 percent of the appraised value less the amount of any mortgage.

Allocating an amount of home equity by this formula is standard practice in the banking industry. The bank could approve less equity for use in a credit line if there was a question about the borrower being able to pay the line back on the set repayment schedule.

Using the formula follows this example of how the line of credit would be determined. The appraised value of the home being $100,000 and 75 percent of the appraised value is $75,000 less an existing mortgage of $50,000 would leave potentially $25,000 available for the home equity line of credit.

Deciding on a home equity loan will depend on the costs of establishing the loan, which can be substantial. Many of the costs of establishing a home equity line of credit are similar to those charged when you get a mortgage.

For example: An appraisal fee, An application fee, Points, Closing costs, Title insurance, and Document preparation. There may be a transaction fee when a draw is made against the line of credit.

Consideration must be given to what plan will be used to pay the equity line back. Some plans set a minimum monthly payment that pays back only a portion of the principal plus accrued interest.

Other plans allow the payment of interest only. This simply means that the borrower will owe what they borrowed when the plan ends. It will pay to study what is a home equity line of credit and how does it work before you decide to barrow against the equity that you have in your home.

You must pay all of the money back even though the money is based off of what your home is worth. Many people default on these types of loans because they believe that the money is theirs in the first place so they do not have to pay it back.

This is not true because if you had the money that you request from the bank or credit union, you would not be asking them for it. Examine every option or other possible ways that you could get the money that you need.

Many people quickly become overwhelmed within the first few months of receiving or having to pay double mortgage payments.