Home Equity Line Of Credit Explained

A home equity line of credit is an excellent way to access money that is just sitting untapped in the form of equity of your home.

The maximum credit that you can access is dependent on how valuable your home is. Banks will extend a percentage of the equity that you have accumulated. As an example, let’s take a home worth $400, 000. If the title is clear, the bank may grant you 50% of that equity, which would in this case be $240, 000 to be used in any way you see fit.

If there is still an outstanding balance on your mortgage, they will give you 60% of the equity of the assessed value minus the balance on your mortgage. So, take that $400,000 home, with $150,000 still owing on the mortgage. Your equity is $250, 000 and 60% of that would be $150,000. In some cases, if you have other debt, that percentage may be lower.

If you have good credit history and have made all mortgage payments on time, the likelihood of being approved for a line of credit is pretty good. Like any loan, the bank will charge interest, at a rate very similar to what you may be paying on your mortgage. This is typically much, much less than the interest rate on a bank loan and certainly several points lower than a credit card. If you need to borrow money, this is by far the cheapest way to do it.

Once you have started taking money out of your line of credit, you have to start making payments. You don’t have to pay the principal if you don’t want to. You can leave the principle untouched for as long as you own the home if you wish. All you need to do is make the monthly interest payments. Whatever the interest is on your remaining balance, that is all that needs to be paid for as long as you own the home.

You can access your equity by check or by transferring between accounts. However, the smart way to use a home equity line of credit is to save it for major purchases. Should you get into financial trouble, your line of credit can be used as emergency cash. However, you can purchase a vehicle, take an amazing vacation or make your equity work for you by purchasing a revenue property, vacation home or mutual funds and other types of investments.

You may wish to purchase a second home, a revenue property, mutual funds or other investments. Rather than take out a loan for a big ticket item such as a vehicle or even a once-in-a-lifetime vacation, using your equity line is the preferred way of borrowing money because the interest rates are so cheap.

The author has been in the Florida real estate field for over 15 years, so before you think about getting a loan you should stop by her site to read further articles that cover Florida home equity lines of credit and bad credit home equity line of credit.