What Is a Home Line of Credit?

A home line of credit is the most popular line credit to consumers. Also known as a home equity line of credit or a HELOC, it allows homeowners to borrow money for any purpose over a long period. Usually the home serves as collateral for the loan, with the bank assuming that you'll repay the line of credit to avoid losing your home in foreclosure. Given the above making prompt payments is crucial, as defaulting on a home line of credit can result to an individual losing their home.

Advantages of Home Line of Credit

·         Some common applications of HELOC loans are to pay for college tuition, pay ongoing bills for medical problems and even to make large purchases such as vehicles. Home equity lines of credit typically have interest rates slightly higher than a traditional mortgage but much lower than credit cards. In addition, interest may be tax-deductible, making it a much better deal than traditional loans.

Amount

·         Home equity lines of credit have a credit limit based on the borrower's equity in the home. The lender appraises the home, takes a percentage of the appraised value, usually between 75 and 100 percent, and then subtracts any outstanding debts owed on the home to determine the credit limit, according to the Federal Reserve Board. The credit limit may also be adjusted to account for your ability to repay the loan based on factors such as your income, other debt and credit score. If your home's value drops, the lender may drop your credit limit as well.

Time Frame

·         When a home equity line of credit is approved, the lender will set a draw period-- usually about 10 years--when you can borrow from the line of credit. After the draw period ends, some lenders require that the entire amount outstanding in the line of credit be paid in full immediately, while others enter a repayment period of a fixed number of years during which payments are made.

Costs of establishing and maintaining a home equity line

Many of the costs of sett ing up a home equity line of credit are similar to those you pay when you get a mortgage. For example:

·         A fee for a property appraisal to estimate the value of your home;

·         An application fee, which may not be refunded if you are turned down for credit;  

·         Up-front charges, such as one or more “points” (one point equals 1 percent of the credit limit); and

·         Closing costs, including fees for attorneys, title search, mortgage preparation and filing, property and title insurance, and taxes.

In addition, you may be subject to certain fees during the plan period, such as annual membership or maintenance fees and a transaction fee every time you draw on the credit line. You could find yourself paying hundreds of dollars to establish the plan. And if you were to draw only a small amount against your credit line, those initial charges would substantially increase the cost of the funds borrowed. On the other hand, because the lender’s risk is lower than for other forms of credit, as your home serves as collateral, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the costs of establishing and maintaining the line. Moreover, some lenders waive some or all of the closing costs.

Home Equity Loans

·         Home equity loans are similar to a home equity line of credit in that the equity of the home is used as collateral for the loan. The main difference is that a home equity loan is for a lump sum amount that is provided to the homeowner all at one time. The repayment term on a home equity loan is set, with equal monthly payments, similar to a traditional loan. Home equity loans are typically a better choice than home equity lines of credit if the money is needed for just one thing in a set amount, such as for a remodeling project or to purchase a new vehicle.