- Home equity lines of credit function as a low cost way to access the value of your home for purposes that you define. The difference between your home's fair market value (FMV) and your first mortgage balance equals your equity (ownership level) in your home. Lenders will give you a credit line equal to some portion of this equity to make repairs, home improvements, or other purposes of your choosing.
- Home equity lines of credit are wonderful alternatives to high interest credit cards and other unsecured credit lines. This is particularly true if you are performing repairs and/or improvements to your home. Instead of paying double-digit interest rates, you'll typically pay only low single digit finance charges. Instead of getting a lump sum of money, you'll be given a line of credit that you can use when you want it, all or in part, wherever you'd like. You'll only pay interest on the amount of money you've added to your loan balance.
- Lenders will typically give you a line of credit linked to your regular checking account or a separate account, which they'll open for you. You can access your home equity line of credit when you need it by simply writing a check. Often, only interest on your outstanding balance is required for monthly payments. You can pay money on your principal when you want and in any amount you choose. Often, but not always, your interest paid is tax deductible.
- Home equity lines of credit are second mortgages, so you should consider the wisdom of adding a second lien to your home. Your lender will record a second mortgage in the full amount of your credit line, even if you only use a small portion of your maximum amount. You will probably have no further ability to borrow against the value of your home once this loan is recorded.
- Home equity lines of credit can often save you money when you want to invest in your home, completing repairs or home improvements. Instead of paying the sometimes high closing costs of a first mortgage refinance, you can simply get a credit line secured by your equity at low interest rates and with few, if any closing costs.
