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Loan Credit Line
A home equity line of credit is a revolving
credit line that uses an individual's home as collateral.
The individual is given a credit limit based on a percentage
of the appraised value of the house minus the remaining balance
of the mortgage. It would work something like this:
Appraised value of home $100,000
Percentage x 75% (example purposes only)
Percentage of appraised value = $ 75,000
Subtract balance owed on mortgage - $ 40,000
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Potential credit $ 35,000
There are other factors that determine the credit limit that
is granted to an individual. These factors include:
- Ability to repay the loan
- Debt to Income ratio
- Credit history / Credit Score (FICO)
If any of these factors are not satisfactory, one can be
denied a home equity credit line.
The term of a credit line is determined by the lender and
can be fixed. An individual might have a certain amount of
years in which they can access funds in the credit line. These
terms differ and are subject to different restrictions. Since
there are no set in stone terms, shopping around is recommended.
A term can be renewable or not. A lender may require full
payment of outstanding balances before the term can be renewed.
A repayment term is an alternate method to the full payment
of the outstanding balance. A repayment term is issued for
a fixed number of years. Access to a home equity credit line
can come in different forms.
Some lenders will issue special checks for an individual
to use. While others issue credit cards or debit cards to
draw from the account. Whatever the method, one should be
aware of the limitations on the account. Some accounts have
withdrawal limits that will prevent withdrawing more than
a certain amount in a given time period and others may have
early re-payment penalties. Still other may have fees levied
on a per withdrawal basis.
If some of these stipulations are violated, there is a possibility
that the account could be frozen until the lender is able
to verify the transactions. A minimum account balance can
be required to avoid additional service charges. This being
said, be fully aware of the requlations on your account before
you start spending.
Knowing the facts before you jump in can make getting a home
equity loan a rewarding decision.
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