What is a home equity line of credit?

A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.

 

With a home equity line, you will be approved for a specific amount of credit--your credit limit. The credit limit is the maximum amount you can borrow at any one time while you have the loan.

 

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

Appraisal of home	$100,000
Percentage	x95%
Percentage of appraised value	$95,000
Less mortgage debt	-$50,000
Potential credit line	$45,000

 

In determining your actual credit line, the lender also will consider your ability to repay, by looking at your income, debts, and other financial obligations, as well as your credit history.

 

Home equity plans often set a fixed time during which you can borrow money, such as ten years. When this period is up, the plan may allow you to renew the credit line. But in a plan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance. Others may permit you to repay over a fixed time, for example ten years.

 

Once approved for your home equity loan, you should be able to borrow up to your credit limit whenever you wish. Typically, you will be able to draw on your line by using special checks.

 

Using a special credit card or other means, some plans allow borrowers to make purchases, in addition to borrowing money. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some lenders may require that you take an initial advance when you first set up the line.