What is Home Equity Line of Credit?
A home equity line of credit (HELOC) is a loan given to the borrower lender over a span of time where the home of the borrower is used as collateral. Your home is a very valuable asset and that is why you would use HELOC only for major financial items like medical bills, or for education. You would not want to use this credit line for daily use. Abusing the HELOC is one of the major causes for the sub-prime crisis.
Details about HELOC
When you use HELOC (Home Equity Line of Credit), there is a particular limit place on the amount of money you can use. This limit is similar to the limit placed on credit cards. The value of your house and the amount you owe in mortgages is used in order to figure out this limit. The figure is 75% of the value of the house from which the amount of debt is reduced. So if the appraised value of your house is $10,000 and your debts are to the tune of $1,000, then you will eligible for a HELOC of $6,500. Your credit history, your income, the safety of your job, and other factors will also come into play while determining the credit limit.
Most of the home equity plans have a fixed time for which you can borrow money, say 10 years. Once this period is over you cannot take any more money. You have to either renew the credit line or pay any outstanding balance that might be present. There are also plan present that allow you to make the repayment over a set time span. When the line of credit has been approved you will mostly use a special check to draw from it. Certain financial institutions also allow you to use a credit card to draw on the line. Depending upon the line you have, there might be a few limitations like the minimum amount you can draw at any given time or the requirement of minimum outstanding balance.
Things to consider when going for such a plan
You should be very careful about the credit agreement, and should read the terms and conditions thoroughly. One of the most important thinks you need to be careful about is variable interest rates. HELOC will usually have variable rates of interest attached to them. These interest rates should be based upon an index that is available publicly. So when you pay the interest it will change as per the values of the publicly available index. Now, the cost that goes into borrowing is directly related to the index. So, you must know which index is being used. You should also know various other details like the frequency of change of the index and what is the maximum value that the index has gone to?
It is also possible that the lender may allow you to change from a variable interest plan to a fixed interest plan during the life of the Home Equity Line of Credit plan. Nevertheless, you should always do your research regarding the index being used.
Details about HELOC
When you use HELOC (Home Equity Line of Credit), there is a particular limit place on the amount of money you can use. This limit is similar to the limit placed on credit cards. The value of your house and the amount you owe in mortgages is used in order to figure out this limit. The figure is 75% of the value of the house from which the amount of debt is reduced. So if the appraised value of your house is $10,000 and your debts are to the tune of $1,000, then you will eligible for a HELOC of $6,500. Your credit history, your income, the safety of your job, and other factors will also come into play while determining the credit limit.
Most of the home equity plans have a fixed time for which you can borrow money, say 10 years. Once this period is over you cannot take any more money. You have to either renew the credit line or pay any outstanding balance that might be present. There are also plan present that allow you to make the repayment over a set time span. When the line of credit has been approved you will mostly use a special check to draw from it. Certain financial institutions also allow you to use a credit card to draw on the line. Depending upon the line you have, there might be a few limitations like the minimum amount you can draw at any given time or the requirement of minimum outstanding balance.
Things to consider when going for such a plan
You should be very careful about the credit agreement, and should read the terms and conditions thoroughly. One of the most important thinks you need to be careful about is variable interest rates. HELOC will usually have variable rates of interest attached to them. These interest rates should be based upon an index that is available publicly. So when you pay the interest it will change as per the values of the publicly available index. Now, the cost that goes into borrowing is directly related to the index. So, you must know which index is being used. You should also know various other details like the frequency of change of the index and what is the maximum value that the index has gone to?
It is also possible that the lender may allow you to change from a variable interest plan to a fixed interest plan during the life of the Home Equity Line of Credit plan. Nevertheless, you should always do your research regarding the index being used.
Source...