A home equity line of credit, simply defnied, is a revolving line of credit, or loan that is taken against the equity that you have built up in your home, and can be obtained from most mortgage companies and banks. In most cases, with a home equity line of credit, you can borrow up to 95 – 100% of the value of your home, minus the amount that you still have to pay on your mortgage. A home equity line of credit is rapidly becoming popular as property values increase, and consumers find that it is a great way to handle their personal debt and other financial issues far more efficently. If you are wondering if a home equity line of credit is right for you, here are some frequently asked questions regarding home equity lines of credit to help you further understand the great benefits of getting one.
How is a Home Equity Line of Credit Different From a Home Equity Loan?
There are three main differences between the line of credit and the home equity loan. First of all, there is a difference in the interest rates you will receive. A home equity line of credit usually has a variable interest rate, while the loan has a fixed (or sometimes variable) rate throughout the life of the loan. Secondly, in a home equity line of credit, you are able to access your money anytime you like, so long as you pay back what you’ve used, but with the loan, you get all the money at once, and repay it over an extended period of time. In other words, with the line of credit you can borrow, repay, borrow repay as much as you like. Last, the home equity loan usually has fixed payments so that you will know what your payment is every month, while the home equity line of credit can vary based on the interest rate and the amount you owe.
Will Interest on My Home Equity Loan or Line of Credit be Tax Deductible?
With the current tax laws, any interest you pay on your home equity loan or your home equity line of credit is tax deductible.
How Much Can I Borrow?
An important factor in determining your credit limit is the equity which you have built up in your home. Equity is determined by taking a percentage (for example 80%, 90% or 100%) of your home’s appraised or fair market value, and subtracting the balances of any outstanding mortgages on the property. And of course, all loans are subject to credit approval.
Do I Have to Occupy The House I am Using for Collateral?
In most cases, you do not need to occupy the house you are using as collateral in your home equity line of credit unless you are requesting an amount 80% or above the amount of equity in the home.
What Information Will I Need to Submit with My Application?
You will need to provide the bank with your residence and work history for the past few years, who your current mortgage is with and their contact information, your current mortgage balance, a current appraisal of your home, and the necessary information concerning your home insurance. You will also need account names, balances and account numbers for debt which you would like to consolidate.
As you can plainly see, a home equity line of credit is one of the most versatile borrowing strategies you as a consumer can implement. It functions much like a credit card in that you don’t use unless you need, and make payments for it only if you use it. It is a good tool for use, I considered using it once to obtain a small doublewide mobile home as an additional investment property. Don’t be tempted though, debt can all to easily become a big financial snare. Be careful…