Equity Line Of Credit
A home equity line of credit can be a great way to finance home improvements, pay off high interest debts or to buy a second home.
What is a home equity line of credit?
A home equity line of credit would be a second mortgage. How a home equity line of credit works is similar to the way a credit card works. The difference is that a home equity line of credit requires collateral and for a credit card you need none. With a home equity line of credit your home equity is used as security for your loan, and you can draw money as and when you want.
Home equity line of credit benefits
Most people want to operate a home equity line of credit, often to get that much-needed home improvement done or to consolidate their other high interest loans. A home equity line of credit offers a much lower rate of interest than credit cards. Some prefer to have a home equity line of credit open just as a fund for emergencies. Funding your home improvements and consolidating your high interest loans through an equity line of credit can save you money in the long run.
Here are the top 4 home equity line of credit benefits:
• With a home equity line of credit, you pay an interest rate that is much lower than that of credit cards and most other commonly available loans. That means you pay less interest over the life of the loan.
• Interest paid on your home equity line of credit is tax deductible, a benefit not available with credit cards.
• With a home equity line of credit you have flexible payment options. Some lenders offer interest only equity lines of credit. If you have an interest only home equity loan you have the option to pay only the interest for a pre-determined amount of time or pay interest plus as much or as little principal as you want.
• Home equity lines of credit offer much larger credit limits. A big credit line at low interest can become extremely useful when you need to make a large purchase, remodel your kitchen or add a new section to your home.
The way a home equity line of credit operate
A quick overview of the unique characteristics of a home equity line of credit:
In the early years of your home equity line of credit you are normally required to make only the interest payments, this too is only if and when you draw money from your account. After the initial years, the full balance of your home equity line of credit would be amortized and paid off over the remaining years. Some companies might require a minimum initial draw from your home equity line of credit.
As it is with any other loan, the interest rate and the annual percentage rate (APR) of your home equity line of credit is determined on you credit score and the combined loan value (CLTV) ratio. Usually, if you have a low CLTV ratio you can be assured of getting a low interest rate and a low APR as well.
The interest rate of a home equity line of credit changes with the prime rate. There is also a margin that is added to the interest rate, which is fixed and is determined at the time of application.
