The most essential things you should know about home equity line of credit
A home equity line of credit or HELOC works like a second mortgage brought against your home or property. But it differs a lot from the idea of home equity loan that deals in a fixed rate and term. Did you ever envisage a large credit card account pledged against your home? A home equity line of credit is pretty much like that! Enjoy the liberty of withdrawing enough case as you need. You are limited by the endorsed credit limit, though. Lenders in general extend the credit line up to 80% your the current equity of the pledged home. The implications of home equity line of credit tend to differ on the basis of the situation of the borrower and the home or property to be secured. Here are three things you need to understand home equity line of credit based credit equity.
There are two numbers you need to know to determine the amount in your case - the appraised value of the property and the residual amount on the mortgage (if any). The property is worth $50,000, for instance, and the owner owes $25,000 on the mortgage, the property’s equity will be $25,000. Commonly, banks lend no more than 80% of the outstanding equity. In this case, $20000 is the highest amount the homeowner can borrow. Multiple factors dictate the probability of your getting an approval for a home equity line of credit. Most common factors are the borrower’s credit history, income levels, amount of debt and other germane financial obligations. And if the borrower fails to pay back the home equity line of credit in a timely manner, he or she will lose the ownership of the property or home.
There are two time components of a home equity line of credit. The first one is the draw period (10 years, usually), whereas the second period for the repayment. In the draw period a borrower is entitled to draw the money, but can’t exceed the credit limit. Today, banks have a policy of providing the borrower with special checks or credit cards for simplifying the fund withdrawal process. At the end of the draw period, the borrower has to pay back the debt entirely. There are practices of renewing the credit line, though. And you can also convert your loan to something more reasonable- an amortizing adjustable-rate loan, for instance, that has to be repaid with a predetermined period. Don’t agree to the loan agreements until or unless you have thoroughly understood the implications of it. Don’t be one of those who are shocked when they face the reality at the end of the draw period.
A home equity line of credit always has an adjustable rate of interest. Your monthly payment varies on the basis of the prevalent interest rates. This rate is dictated on an index – usually the prime rate that the US Federal Reserve sets. As you get the rate by your lender, it’s actually quoted as the index + / - a particular margin. To illustrate, if 6 is the prime rate and if the lender bank offers prime minus 2, you have to pay 6% interest rate for that particular month. But the sigh of relief is that, the borrower need to pay interest just whatever amount has been borrowed. In other words, you – the borrower – will not pay any interest on the total line of credit. Usually, you get to decide the monthly amount to pay for the principal. But there’ll be some minimal payment of US$50 in cases of outstanding balance. The borrower can abstain from paying back any of the principal till the end. However, you will be hard hit by huge debt burden at the end.
Tips and comments:
- Missing payments can be disastrous, as you might actually lose your property or home
- Don’t use it as an emergency fund, as the lender bank has the right to freeze the home equity line of credit anytime when there’s any depression in the economy, job market or the perceived equity of the property.
- Don’t consider this free money! It’s actually more debt. If the home is on mortgage, you have to pay both the mortgage and the home equity line of credit.
- If the home equity line of credit requires you to make a balloon repayment when the withdrawal period is over, this might feel really heavy to you.
- Sometimes the borrower is not entitled to refinance unless and until the home equity line of credit is paid off first.
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