Understanding a Home Equity Line of Credit
Written by: Martina Hargrove
As anyone who owns property will often tell you, the home is one's most valuable asset. A home equity line of credit gives homeowners the chance to tap into the equity they've paid into their property, and use it however they wish. In fact, many who are approaching or planning for retirement know that owning a home is an excellent way to prepare for the future, as well as for providing the chance to utilize equity they've spent years building.
The Differences Between a Home Equity Line of Credit and a Mortgage
A home equity line of credit, often abbreviated HELOC, differs from the average mortgage in several distinct ways. A mortgage involves paying the entire amount of the home or property's purchase price for a set amount of time until the debt is repaid in full, plus all of the accrued interest. As time passes and more payments are made, the amount of the mortgage decreases while in turn, the equity in the home increases.
The home equity line of credit gives homeowners the opportunity to easily access the money, or equity, that they've paid into their property. There are two ways to receive the funds after being approved for a HELOC, either via checks that are written out and used as you like, or by using a debit card that will be issued to you after the approval process is complete.
Unlike standard loans issued from a bank or other similar financial institution, such as a credit union, involving one a lump sum that must be paid for a set amount of time at a fixed interest rate, home equity lines of credit are paid back as they are used at varying interest rates.
How to Qualify for a HELOC
One of the benefits of the HELOC is that they are usually relatively easy to qualify for since the equity in your home is basically used as collateral, ensuring that the lender will be repaid. The majority of larger banks will be able to provide an answer as to your approval usually within a few minutes, provided you aren't asking for more than a certain percentage of your available equity, which is usually 70%.
A steady and verifiable employment record, along with a good credit rating will both increase your chances of being approved. In some instances, the lender will also require an appraisal of the home before granting or denying a line of credit.
Which is Better, a Home Equity Line of Credit or a Home Equity Loan?
Many homeowners find themselves trying to decide between applying for a home equity line of credit, or obtaining a home equity loan. For short-term needs or a one-time event, such as a wedding, or paying for small home improvements, a loan would be the wiser choice, whereas a HELOC is most useful for needing money on more than one occasion as one of its most notable features is its great flexibility.
Besides considering how large of a payment you'll be able to afford, also remember that a home equity line of credit will have a variable interest rate, so be sure you'll be able to handle those fluctuating rates. With this type of revolving credit line, it may also be tempting to spend more than you would comfortably be able to repay.
