How Does a Home Equity Line of Credit Work?

Home Equity Line of Credit

A home equity line of credit is a loan that that helps you fund a long term project by allowing you to withdraw varying amounts of money at different times. As collateral, your home is what is used as security for the loan. When you need to finance a long term project like a course of study or an investment in shares, a home equity line of credit loan comes in handy.

The Process

Approach a financial institution that gives a home equity line of credit loan. You have to fill out an application before approval for the loan. Choose between fixed rate loans and variable rate loans. The rate of fixed rate loans will not change through the loan period, while variable rate loans keep changing at different stages of the loan. The lender will appraise the value of your home and typically lend 75 to 80 percent of the value of your home. The lender will give you a credit card so that you can withdraw the money you need over a period of time. The lender will specify a credit limit; you cannot withdraw money above this sum. The loan will be for a fixed period and, depending on your repayment history, the lender will renew the loan or allow you to borrow additional money. The term of the loan is usually between 10 and 15 years.

Finding a Home Equity Line of Credit Loan

Mortgage companies, banks and other financial institutions offer home equity line of credit loans. There are many players in the lending market and you should shop among the many lenders to get the best deal. With the advent of the Internet, shopping for the best loan customized to your financial circumstances has become easy.

Things to Keep in Mind While Shopping

Before choosing a lender, read the credit agreement and examine the terms and conditions in the agreement. The credit card issued will come with an APR, or annual percentage rate, and you must check if the APR and the repayment terms are manageable under your budget. Check for hidden fees. You may be liable to pay for the home appraisal fees, application fees, attorney's fees, title search and title insurance, mortgage preparation and filing, property insurance and taxes. Some companies waive these expenses but you need to check if they are saddling you with hidden costs. Check the repayment terms and interest payment terms and choose the most affordable option. Check the terms and conditions of refinancing the loan or renewing the loan. Under the Federal Truth In Lending Act, the lender is legally bound to give you all required information about the loan.

Advantages and Disadvantages

The advantage of a home equity line of credit loan is its flexibility; you have access to a large amount of money which you can withdraw on an as needed basis. The disadvantage is that you risk losing your home if you do not repay the loan in a responsible manner.