What’s A Home Equity Line of Credit?

home equity line of creditA home equity line of credit is essentially a loan that’s given where the equity in your home is used as collateral. The homeowner is given a total amount they are able to lend via the line of credit, and can withdraw money from it as needed. The credit is repaid based on the agreed terms with your lender. Think of it as being similar to that of a credit card and the specified available limit.

How much can you borrow on a Home Equity Line of Credit?

The amount you’ll be able to borrow will be+ based on your home’s equity along with your credit rating. Your home’s equity is the total worth of your home, minus the amount owed in the principal on the mortgage. 

TOTAL VALUE OF HOME – OUTSTANDING PRINCIPAL BALANCE = EQUITY

The amount of money, therefore, is based on the defined equity limit and can be borrowed on an as-needed basis. There will also be a time frame set for the agreement and the rate of borrowing and repayment would be more specific to your agreement with the lending institution. 

Keep in mind that factors such as your credit score, your income, and even stability of employment, will come into play to determine your terms and conditions. Many lending institutions allow you to see their rates ahead of time. This allows you the comfort of doing your research. A home equity line of credit tends to also be at a lower rate than other types of loans due to the stability of the real estate that is backing it.

Now, if you have just purchased your home or do not have a significant amount of equity built up in your home, then it is unlikely that you have access to this home equity line of credit.

Benefits

There are tons of benefits to having freely available credit. For example, should any emergency arise, then you have the comfort of being financially able to tackle it. Others have also used the home equity line of credit to do things such as remodeling their homes.

You will need to check on the specific rules with your own lender, but often a home equity line of credit can be used to purchase additional real estate as well, or even to invest in equity markets.

The most common use of a line of credit is to consolidate existing high rate debt under one umbrella. As you complete your payments and reduce the outstanding balance, you can then access the credit again should the need arise.

Listen to your Financial Representative

The lender will inevitably sit with you to determine the amount of available equity and also to balance this with your current financial situation. It is imperative that with the advice given, the equity does not become a financial burden. The advantage is that you have access to credit when it is needed.

If you are unable to meet your end of repayments, then you become at risk of losing your home.

What will also impact your home equity line of credit amount is your current debt-to-income ratio. This provides the lender an idea of what you can reasonably afford as a borrower, given your level of income. The amount of credit can also be determined by one of the widely available tools such as the home equity calculator. This of course helps you with your financial analysis. Doing this analysis helps you to know how much credit in your home equity you can reasonably access.

Your Comfort Level

Once you are ready to go ahead, then the lending institution will work to determine the current market value of your home and property. An appraisal of your home must be done. This is coupled with the amounts paid in the mortgage principal, and your loan specialist will then highlight how much is in the line of credit.

We want to help you find the best line of credit options for your needs. Use our free broker matching tool and speak with a recommended expert today.