Home Equity Line of Credit

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A Home Equity Line of Credit, known as a HELOC, is using a credit line to borrow against the equity in your home. It is a form of revolving credit which requires you to use your home as collateral for the loan. Money is put in a loan account that is available for you to use when and how you please. You make no monthly payments until you draw on it. If you sell your home, most plans require you to pay off your credit line at that time.

By using the equity in your home, you may qualify for a sizable amount of credit at an interest rate that is relatively low. Most loans come with variable interest rates, some with attractive low introductory rates, and a few come with fixed rates. Under the tax law, depending on your specific situation, you may be allowed to deduct the interest because the debt is secured by your home.

You may also find most loans have large one time upfront fees, others have closing costs, and some have continuing costs, such as annual fees. You can find loans with large balloon payments at the end of the loan, and others with no balloon payments but with higher monthly payments.

Many homeowners use their credit lines only for major items such as tuition, home improvements or emergency home repairs, or medical bills and not for day to day expenses.

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. Example:

In determining your actual credit limit, the lender will also consider your ability to repay, by looking at your income, debts, and other financial obligations as well as your credit history.

You also will want to know whether you are paying back both principal and interest, or interest only. Even if you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of principal at the end of the loan. In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment.

Perhaps another form of credit would be better for you. Before making a decision, you should weigh carefully the costs of a home equity line against the benefits. No one loan is right for every homeowner. The challenge, then, is to contact different lenders, compare options, and select the home equity credit line best tailored to your needs. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. Because home equity loans give you relatively easy access to cash, you might find you borrow money more freely. By using your home as collateral, this may put your home at risk if you are late or cannot make your monthly payments. Always remember:

Failure to repay the amounts you've borrowed, plus interest, could mean the loss of your home.

When the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this balloon payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.

Always review the home equity contract carefully before you sign it. Do not hesitate to ask questions about the terms and conditions of your financing. To help you do this, please request a free copy of the checklist by contacting: Public Reference, Federal Trade Commission, Washington, D.C. 20580. (202) 326-2222. TDD call (202) 326-2502.)

Anyone who wishes to borrow against their home equity, has three days, it's a legal right, to walk away from that home equity loan if you change your mind for any reason within three days of its issue, according to the Truth in Lending Act.

Page 2 What is the interest rate on a home equity line of credit loan?

References:
www.ftc.gov/bcp/conline/pubs/homes/homequt.htm

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