Home Equity Line of Credit (HELOC)

A home equity line of credit also considered home equity loan or HELOC as the name implies is a loan in which the home owner uses the equity, if any, in his home as collateral. It is also used as a form of revolving credit in which a home serves as collateral. A home equity loan usually creates a lien against the borrower's house. Home equity loans are mostly used to finance home improvements, major expenses, debt consolidation, etc. This differs from standard loans because the borrower or home owner is not advanced the entire sum up front, but uses the line of credit to borrow sums totalling no more than the amount.

Many home equity lenders will set the credit limit on a home by taking a percentage of the current home's appraised value and subtracting the balance owed on the existing mortgage.

For example (assume 70% of appraised value),

Appraised home value = $250,000
70% of appraised value = $175,000
Outstanding Mortgage balance = 125,000
Home equity line of credit = $50,000

Most lenders will also take into consideration certain conditions in determining your actual credit limit, such as credit history, income, outstanding debts, credit ratings, and other financial obligations.

Do you need a home equity line of credit HELOC?

Home equity loans often have a lower interest rate as compared to other types of loans. It also has tax advantages usually not available with other types of loans.

Consequently, home equity lines of credit or home equity loans require the use of a house as collateral, thereby creating a lien on the house which may be risky if you are late or cannot make your monthly payments.

Before applying for a home equity loan, you’ll need to consider several factors such as:

• Amount you can borrow on a home equity credit line (most lenders let you borrow up to 85% of the appraised value of your home minus amount owed on mortgage).
• Interest rate
• Closing costs (application fee, attorney fees, title search, appraisal fees, points).
• Continuing costs – this includes transaction fees, annual membership fees, participation fees, etc.