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Home Equity Loan
A home equity line of
credit 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-meaning the
maximum amount you can
borrow at any one time
while you have the plan.
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 |
x 75% |
|
Percentage of
appraised value |
$75,000 |
|
Less existing
mortgage debt |
-$40,000 |
|
Potential credit
line |
$35,000 |
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 10 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 10 years.
Once approved for the
home equity plan,
usually you will be able
to borrow up to your
credit limit whenever
you want.
Many of the costs in
setting up a home equity
line of credit are
similar to those you pay
when you buy a home. For
example:
-
A fee for a property
appraisal, which
estimates the value
of your home.
-
An application fee,
which may not be
refundable if you
are turned down for
credit.
-
Up-front charges,
such as one or more
points (one point
equals one percent
of the credit
limit).
-
Other closing costs,
which include fees
for attorneys, title
search, mortgage
preparation and
filing, property and
title insurance, as
well as taxes.
-
Certain fees during
the plan. For
example, some plans
impose yearly
membership or
maintenance fees.
-
You also may be
charged a
transaction fee
every time you draw
on the credit line.
If you are thinking
about a home equity line
of credit you also might
want to consider a more
traditional second
mortgage loan. This type
of loan provides you
with a fixed amount of
money repayable over a
fixed period. Usually
the payment schedule
calls for equal payments
that will pay off the
entire loan within that
time. You might consider
a traditional second
mortgage loan instead of
a home equity line if,
for example, you need a
set amount for a
specific purpose, such
as an addition to your
home.
In deciding which type
of loan best suits your
needs, consider the
costs under the two
alternatives.
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