How Does A Home Equity Line Of Credit Work

People often need a source of credit for an important project that they have embarked on. This could be investing in shares, taking some further education courses or extending their home. By the very nature of these tasks, the money to finance them could be needed over an extended period and in varying amounts. Thus a source of credit is useful to fund these projects. This is where a home equity line of credit fits in. This article will discuss how a home equity line of credit works and some things to consider if you decide to take one out.

If somebody owns a home or is paying a mortgage off for a property they may be eligible for a home equity loan line of credit.

The principle behind the loan is that a lender will lender around 75-80% of the value of a property to the property owner. If the property is worth $100,000 and the owner has paid $50,000 of the mortgage, then the lender may lend the owner another 25-30% of the value of the property ($25,000 - $30,000).

If the property owner decides to take a line of credit for this amount then the money can be drawn on over a period of time much like you might use a credit card. It is, in effect, saying that you have a credit card charged up to $25,000-30,000 that you can use however you see fit.

Once again, it is important to stress that although it is like a credit card, the money should be used wisely. Ultimately, this money is secured by your property. If your spending gets out of hand and you can't pay back the line of credit you could lose your house. Use the credit to add value to something or that has a high return on investment potential.

If you decide to go for an home equity line of credit then it is important to look around at the best deals. In most cases you will get your line of credit with the mortgage company that you already have the mortgage with but you can negotiate a better deal if you know what other equity line of credit deals are around.

One thing to consider is the home equity line of credit rates. This is the rate of interest you will be charged for using the credit. In most cases, if you have a variable rate home loan, you will be charged at this rate. If you have a fixed rate, then the interest rate on the line of credit will be worked out when you apply. This can be negotiated if you know that you can get a better deal elsewhere. The chances are that the lender will not want to lose your business so may meet you half way. The same goes for the additional costs. These could be arrangement fees and closing costs.

Home equity line of credit loans are a flexible way to have access to a large amount of money (depending on the equity in your home) but always use the money prudently.