Understanding a Home Equity Line of Credit (HELOC)

August 12, 2008 · Posted in Loans 


Any line of credit means basically just exactly that. You have a dollar amount that you have been approved for and you may draw against that dollar amount up to the maximum limit. The loan to value ratio is the biggest factor in determining your home equity line of credit amount. Usually any bank of lending institution can give you a rough estimate of what your loan to value ratio is. What this basically means is how much your home is worth based on the finding of a professional appraisal (something that is required during the purchase of the home) and how much you currently owe against the property.

A home equity line of credit is not the same thing as a home equity loan or second mortgage. While the second mortgages and home equity loans have a fixed or variable rate, a home equity line of credit will have a variable rate. The HELOC is also more flexible that the loan or second mortgage. You can actually borrow what you need and continue to go back for money as you need it, rather than getting a one time loan. Think of it as a credit card in a sort with a maximum spending limit.

Usually the financial institution that provides your HELOC establishes a draw period and repayment period. This is usually around 10 year but can be shorter or longer. During the repayment period you pay principal and interest on the loan.

There are closing costs involved with a home equity line of credit, just as there would be with most other types of loans. These will vary from financial institution and should be thoroughly researched before making your decision to take out a home equity line of credit. If you go to a mortgage office, inquire what institution they use. They usually have several options, all of which will have different fees and closing costs involved.

With some banks, like Bank of America for example, you can even link your checking accounts to a home equity line of credit (or even other loans through your accounts) to cover overdraft charges. This became popular in 2005 with various lending companies.

A home equity line of credit can be a great way to seek out the funds needed to make home improvements that will increase the overall value of your home. Consider all your options when seeing a home loan. Research loans against your home and a home equity line of credit.

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