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What You should Know About Home Equity Lines of Credit

What You should Know About Home Equity Lines of Credit

Here, we have tried to shed some light on what is Home Equity Lines of Credit, (HELOC) and provided answers to frequently asked queries regarding the paperwork involved, the meaning of home equity, and the nature of the loan.
Scholasticus K
The reason people usually do not favor a HELOC, (Home Equity Lines of Credit) is due to the fact that this loan has a slightly complex mechanism, which does not confirm to the working of a conventional 'loan'. It rather works as per an account or a line which gives out a stipulated volume of credit.

It means that unlike a normal loan, the borrower can borrow a sum of money over a certain time period till a certain limit, instead of being paid a sum in bulk. This often works to the benefit of the borrower. In the following paragraphs, the terms home equity and home equity lines of credit have been discussed. This loan is viewed to be a secured-personal loan, and the borrower can borrow sums of money at his/her discretion, whenever he or she wants. The purposes can be variable.

Valuing Your Home Equity

Before going on to the home equity line of credit let us know more about home equity. You purchased your home for a sum of say $X. This happened, say, 5 years ago. Today your house is probably valued to be about $X (+) X1. Now this is due to the feature of the real estate market. The logic is that the world population is increasing and the total volume of land is not, hence in the process, the total land that we can inhabit remains limited.

As a result the land prices, tend to shoot up because of more demand and limited supply. In turn, your property's value is always on the rise, save a few instances or probabilities. Thus as a result, your home's value over purchase price is the equity. In the concept of home equity there are three cases which can occur:
  • Case 1: Being the most common case, you have an increased price of your home but you have a mortgage loan. The collateral of the mortgage loan is equivalent to the original purchase or is proportional to the principal amount of loan. The risen amount X1 is the amount which becomes your home equity.
  • Case 2: Your homes price has dropped below the original prices, which happens quite rarely. In such a case, the above logic also applies and sadly, you will have a small amount of equity left with you.
  • Case 3: In the third case, your home is not a collateral nor is it under the obligation of any loan. In such a case, the entire value of the house can become a home equity.
Now one might ask that what is so great about a home equity. Well, it is an important asset, which you can avail, pledging it as a security or collateral for a loan. With an average or an above average credit score, you can get a really good loan against the equity. The loan can be of any nature, that is it can be anything right from educational loans to personal loans, these loans are often known as home equity loans.

What You Should Know about Home Equity Lines of Credit

Now, the hard part is over because the actual features of the loan are really ordinary and easy. This kind of line of credit is basically secured with the home equity, and that gives it the name. The basic mechanism is that the home equity line of credit is a revolving line of credit. It means that it acts as an account, from which a borrower can borrow variable amounts, at his discretion at any point of time. There is a time limit and credit limit till which, the money can be borrowed. Upon the expiration or either, the repayment of the line of credit starts.

The repayment is done in the same manner like conventional loans. The repayment is, of course, in the form of installments, and of course must be done in a stipulated time period. The confusing part of the HELOC is that the interest rate is variable, and is decided as per the index of some prominent government agency's interest rates, such as the interest rates on specified government issued bonds. The interest rate is computed as per the borrowing period/time and the sums are borrowed. Thus the borrowing amount and time largely influences the interest rate.

The home equity line of credit is a great form of borrowing, and is used quite frequently by several people engaged in business as well as by self-employed people. Others use it for education and even home improvement. Getting such a line of credit is not that difficult, owing to the fact that the borrowing requirements are not very stringent.