Home Equity Lines of Credit, Fixed Rate Loans, Variable Rates

An introduction to home equity lines of credit

A home equity line of credit may be an effective financial tool for people to obtain a loan with minimal hassle. There is huge demand for home equity lines of credit because of the convenience of obtaining them. This popular financial instrument serves as a platform from which financial lenders offer additional services. In this article, you will learn about this type of credit and who can benefit from it.

What exactly is a home equity line of credit?

A home equity line of credit can simply be defined as a credit line which enables a property owner to obtain a loan by using his home as collateral. Homes are the largest asset owned by most people. When faced with a major expenditure, many people seek out this type of credit. Generally speaking, those who need home renovations, have medical bills, or demanding education requirements usually go for this type of loan. When home values are on the rise in an area, the demand for home equity lines of credit increases. The credit line serves as an available option to manage personal debt.

How does a home equity line of credit work?

The equity in your home is the balance remaining between the outstanding mortgage and the appraised value of your home. With a home equity line of credit, you are permitted a speci?c amount of credit. This is the maximum amount of money that you can borrow at any given time. Most loan officers determine this credit limit using a percentage of the home’s appraised value and then subtract the amount owed on the mortgage. The lender will consider your ability to repay the loan (the amount you borrowed plus the interest) by reviewing your credit history, income, debts and financial commitments to determine whether to approve your credit line and limit. Home equity lines are usually set up for a fixed period, which may be renewable.

Home equity credit lines usually involve variable interest rates based on an advertised index. You will need to know the variability of the rate, the margin, the ceiling, and the maximum historical rate.You may be able to convert a variable interest rate loan to a?xed rate loan while on your plan, or convert all or part of your credit line to?xed-term installments. Lenders sometimes tantalize you with a very low introductory fixed rate that is only valid for a short period in order to obtain your business.

If you plan to sell your home, you will probably have to immediately repay the debt on your home equity credit line. Additionally, you may be prohibited from renting your home under the terms of your credit plan. If these are probable scenarios, you should reconsider the viability of this financial instrument.

Remember, if you fail to meet the payment obligations on your loan --the principal plus interest -- you can lose your home.

How can you apply for a home equity line of credit?

Lenders understand the requirements for home equity lines of credit and make it easy for people to obtain these loans. Many fees are involved in obtaining these loans such as the property appraisal, application fee, up-front charges and closing costs.There may be other fees in the duration of your credit line. Regardless, you will need to carefully review the fine print in the credit agreement, and consider the cost of setting up the credit line, the annual percentage rate (APR) involved, and the terms and conditions.