Introduction
If you are in the market for some credit, then credit equity line maybe a good option for you to consider. However, before you make an application it is always advisable to weigh the costs of a credit equity line versus the benefits. Here are some basic “tenets” to go by, as you search for a home equity plan:
Home Equity Line of Credit: Definition
A credit equity line is a type of revolving credit, where your house serves as the collateral. Home equity credit lines can be used to meet a variety of financial needs, such as education, medical bills, home improvement, etc. The amount of credit you can be approved for will depend on the appraised value of your house and the balance you owe on the existing mortgage. Most lenders will set the limit on a home equity line, by taking a percentage of a home’s appraised value minus the balance owed on the existing mortgage.
How it Works
Credit equity line will often stipulate a fixed period in which you can borrow money. At the maturity of the “draw period”, a lender may or may not allow you to renew the credit line. Some plans may require you to pay back the full amount of the principal, at the end of the draw period, while others may allow for repayment over a fixed period. Once approved for a home equity line, you will be able to borrow up to the limit of your credit line. To draw on your line, some home equity plans will provide you with special checks, credit cards or other avenues. Some plans may place some limitations on how you use the line. For instance, some plans may require that you borrow a minimum amount each time you draw on the line or maintain a minimum balance.
Tips and comments
What to Consider When Shopping for a Home Equity Plan
While shopping for a credit equity line, look for a plan that best meets your financial needs. You should acquaint yourself thoroughly with the credit agreement, examining the terms and conditions of various plans, making sure to note the annual percentage rate (APR) and the costs of establishing the plan. Also make sure to note the closing costs and other fees and charges, which may vary from one lender to the next.
Variable Interest Rates
Most credit equity line will typically be pegged on a variable interest rate, rather than a fixed one. This variable interest rate will be based on a publicly available index, such as a U.S Treasury bill rate or the prime rate published in major newspapers. Most home equity lines will cite their lending rate based on the value of the index at a particular time, plus a margin of lets say 2 percentage points. To estimate the possible cost of the home equity loan, you should consider how high the index has risen in the past and how often the value of the index changes. However, home equity lenders are required by law to place a ceiling or cap on the extent to which the interest rate may rise over the life span of the plan.
