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Home Equity Line Of Credit

Like a home equity loan, it is based on the amount of equity you have in your home. Instead of receiving one lump sum you are able to take out as much as you need when you need it as long as it is within your credit limit. Its kind of like having a credit card.

Most home equity credit lines have a draw period, which is a set length of time (usually 5-20 years) in which you can use the money in the account by writing a check or use a credit card for the amount you need within your credit limit.

At the end of the draw period some programs may allow you to renew the line of credit. Different plans also have different requirements for paying the money back. You may pay at anytime during the draw period or some may have a repayment period. This is a set number of years you have to pay the loan back in full.

The length of time varies. Most have a minimum monthly payment based on the amount of your line of credit. Some may require payment in full at the end of the draw period. Make sure you fully understand your options and requirements for repayment before opening a home equity line of credit.

There may be other limitations to consider as well. Some lines of credit may require withdrawal of a set minimum amount or require you leave a minimum amount outstanding.

Home equity lines of credit are usually based on variable income rates. Some variable rate plans will have a limit on how low your interest rate may go, and a limit on how much your payment will increase. Since the plan is secured by your home, there will be a set limit on how much your interest rate can increase.

Look for lenders whose quarterly adjustment is around 0.5% increments or less. Based on your lender, you may also be able to convert to a fixed interest rate at some point during the plan. Look for plans that are flexible and allow conversion to fixed rates.

The fees are similar to home loans. You can expect appraisal fees, application fees, closing cost and title search fees. Every lender is different and the fees you pay will vary with the plan you choose.

When considering taking out a home equity line of credit, there are some things you need to watch for and compare other than the fees and interest rates. Be on the lookout for financial penalties that some lenders may try to charge when you pay off the loan. Avoid lending companies who do not refund the fees related to your application when you go to closing, or if they try to charge your account maintenance fees.

One important feature of home equity line of credit that differs from a home equity loan is that most plans allow the lender to reduce a credit line or even freeze the line of credit if they "reasonably believe" that you will be unable to make your payments due to a change in your financial situation, or if you have a significant decline in the value of your home.

Communication with your lender is the key, if this should happen to you. It may be possible to restore your credit line if you can prove your financial circumstances have not changed or that your home has not lost value. If your line of credit cannot be restored then you may be able to take out another line of credit with another lender to pay off your original line of credit.

If you decide on this option, know that you will again have fees to pay associated with obtaining the line of credit.

If you need help deciding what is best for you, a home equity line of credit or a home equity loan, try this calculator.