Facts About Home Equity Lines of Credit
Homeowners take advantage of a home equity line of credit (HELOC) to get money almost "on demand." A line of credit is used much like a credit card. The key consideration is that your payments will vary each month, based on how much you have drawn from your credit line and the prevailing interest rates when your payments become due. Some lines of credit are also structured with a balloon payment when the loan matures.
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Different Than a Loan
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Monthly payments can vary. The basic difference is that a home equity loan typically has a fixed interest rate, funds are given in a lump sum, and repayment begins immediately. Using a line of credit requires that you are able to budget your money wisely because payments are not always fixed and can vary from month to month.
Calculating Credit Line Amount
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Lenders use a percentage of the home's appraised value and subtract that from the balance owed to calculate the maximum for a line of credit. They also assess your credit score, history and ability to repay debt to determine your interest rate--just as they do when you apply for a "traditional" loan.
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Typical Uses
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Most homeowners opt for a line of credit when money isn't needed all at once, such as for a home improvement project, or for education or medical expenses. Other people use them for purchases that have a set or more predictable monthly payment, such as payments on a new car.
Considerations
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Because your home becomes the source of collateral, think first. Honestly evaluate your ability to repay. Carefully assess your budget, savings and back-up finances in order to avoid default and the possibility of foreclosure on your home, especially if it is your primary dwelling.
Types of Lenders
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Explore banks, credit unions and other mortgage lenders if you are in the market for a HELOC. Check out rates and special offers at sites such as bankrate.com.
Get the Best Terms
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Pull your own credit score on sites such as myfico.com and annualcreditreport.com. Get an idea of the interest rate you may be offered, and use the online calculators to estimate what your payments might be.
Gather and make copies of your tax returns, paycheck stub and mortgage payment receipts. Be prepared to paint a strong picture of creditworthiness to make the lender confident about your ability to consistently repay on time. Make every effort to improve your chances for approval.
Shop different types of lenders to compare rates and terms. Inquire about a fixed interest rate. Get an understanding of upfront or out-of-pocket expenses they may require, such as an application fee, home appraisal, and related closing costs. Sometimes lenders will freeze a line of credit --ask what conditions could make this a possibility.
Truth in Lending
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Make sure the lender discloses terms during the application process. Truth in Lending laws also provide a three-day grace period after approval, if you decide to cancel your home equity line of credit.
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References
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