Loans-Help | A Home Equity Credit Line

One way to borrow against the value of your home is a home equity line of credit, which is a form of revolving credit in which your home serves as collateral. 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%) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

Appraisal of home: $100,000
Percentage of appraised value: $75,000 ($100,000 x 75%)
Less mortgage debt of $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 might allow you to renew the credit line. In addition, some plans might call for payment in full of any outstanding balance. Others might 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. Typically, you will be able to draw on your line using special checks.

Under some plans, borrowers can use a credit card or other means to borrow money and make purchases. However, there might be limitations on how you use the credit line. Some plans might require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some lenders also might require that you take an initial advance when you first set up the line.

What should you look for when shopping for a plan?

If you decide to apply for a home equity line, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan. And remember, the disclosed APR will not reflect the closing costs and other fees and charges, so you'll need to compare these costs, as well as the APRs, among lenders.