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What is home equity line of credit?

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What is home equity line of credit
What is home equity line of credit

If you are searching for credit in the market, home equity line of credit is possibly one of the best things to look at. However, before arriving at any decision, it’s quite important for the borrower to gauge various factors, its advantages and drawbacks, and most important, what it is.

Quite similar to a secured loan, home equity line of credit is a form of loan offered to you with your home as collateral. This loan, however, must not be availed for insignificant requirements. Majority of people borrowing this loan use the money for educational needs, pay medical bills, make home improvements, etc.

Repayment of this loan must be taken seriously as non-payment can cause you lose your home. You can avail home equity line of credit even if you are still making mortgage payments.

Most lenders would agree to offer you this credit, but within a limit. They will first assess the appraised value of your home and offer a percentage, say 80% on the value as home equity line. If you, however, still owe some mortgage payments, the amount is deducted from the loan amount. Let’s consider this example for better clarity.

You home’s appraised value is say around $200,000, and the percentage of the loan amount is 75%. So, you are entitled to receive $150,000 as home equity line of credit. But you still have to repay $50,000 mortgage. So, you will eventually receive $150,000 – $50,000 = $100,000.

The percentage set by lenders, however, depends on the various factors. They take in to consideration your ability to repay the loan, your credit report of course, your total income, your total debt, savings, etc.

If you are approved for a home equity line of credit, you can borrow any amount of money (within your limit of course) at any time. However, you will have to make use of special checks to withdraw money for this purpose. In some cases, lenders also allow borrowers to take money through credit card or other financial products.

Nevertheless, the particulars of home equity line of credit vary from one lender to the other. Some may ask you to withdraw ‘X’ amount every month, some may ask you to maintain a minimum balance.

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