In the social environment today, there are many pressures that require quite a sum of cash to keep up with. Education can be quite expensive, hospital and medical bills are far from cheap, not even home improvements are easy on the pocket. Among many others, these reasons keep home equity line of credit an option to many people who have invested in residential properties.
Home equity line of credit is a pre-approved loan-able amount using a residential property as collateral. It's like having a ready fund that one can withdraw from when in need of cash. Many people consider their houses the largest of their assets. However, because it is the borrower's home that is used as collateral, this fund is normally utilized for major expenses and not for daily cash requirements only.
This is how it works. In a nutshell, an applicant for this type of credit will need to have his home appraised or valued at current market rates. A portion, or percentage, of the total appraised value can potentially be approved as 'creditable' under the plan. This means that the borrower can loan a maximum amount based on the allowable 'credit line'. For example, if the property is valued at $1,000,000, 75% of that value can possibly be approved as potential credit line. Unless there are other mortgages involved in the property, $750,000 can be loaned by the homeowner, once approved.
Needless to say, it is not only the value of the residential property that is taken into consideration in an application for a home equity line of credit. The following points concerning the applicant are also considered by the approving officer:
- Capability to repay the loan
- Current income
- Existing debts / loans and other financial commitments
- Historical credit disciplines
Once approved, a 'draw period' is set, say, a fixed period of 10 years. During this time, the borrower can take money out within the credit line any time he requires. At the end of the period, depending on the plan, the borrower may either renew the credit line, pay back the full value of the loan or begin the 'repayment period'. The repayment period is a fixed measure of time, say, another 10 years, when the borrower can return the borrowed money within the duration of the period.
If you are considering this type of financial credit, do take note of some necessary costs that will be incurred in relation to the Home Equity Line of Credit.
- Property appraisal fees
- Application fees, possibly non-refundable regardless of approval result
- Costs for closing - payment for lawyers, title works and taxes
- Annual fees and transaction fees during the loan term
These fees are another reason why borrowers utilize this credit line for major expenses only.
Remember, the flipside of the advantages and convenience of the home equity credit line
is the possibility of losing your home when you are unable to pay back the loan. So, be careful in your loan decision.
