What Is A Home Equity Line Of Credit?

A home equity line of credit is a form of credit in which your home serves as collateral. Since a home is likely to be a person's largest asset, when people decide to take equity out on it, it is because they need money for major expenses such as home renovations, education, purchasing a car or medical bills. You are not likely to see a person taking out a home equity line of credit for daily expenses as it is a great risk and puts your home in jeopardy.

If you apply for a home equity line, you will be approved for a specific amount of credit and this will be the maximum amount that you can borrow at any time that you choose. Lenders tend to determine the amount of your credit limit on this type of loan by taking a percentage of the home's appraised value (for example, 70%) and subtracting the balance that is still owed on the mortgage.

In figuring out you credit limit, the lender will need to take into account your ability to repay the home equity line of credit by looking at your income, debts, and other relevant financial obligations, such as paying for tuition and child/spousal support (where applicable), as well as your credit history.

The "draw period" is a period on a home equity plan during which you can borrow money. When this "draw period" comes to an end, you will probably be able to renew your credit line if you plan on doing so. However, if the plan that you have does not permit renewals then you will not be allowed to borrow additional money once the period comes to an end. Certain plans will ask the borrower to pay the remaining balance owing in full at the end of the period. Nevertheless, there are other plans that will allow you to repay the balance owing over a given amount of time. When you get approved for a home equity line of credit, you will be able to borrow the money whenever you please. Usually, you will be given particular checks, a credit card or other means to draw on your line of credit.

Although, there can be some limitations on how a person can use their line of credit. For example, some plans set a minimum amount that a person can withdraw each time and to keep a certain amount of money owing on your line of credit. You should be well aware of your financial needs and what you need the money for before applying for a home equity line of credit.