About an Equity Line of Credit

Home equity refers to the amount of money your home is worth above what you owe on it. Homeowners can borrow against this equity through lines of credit established with a lender. An equity line of credit is like a credit card in that there is a preset amount of credit that can be accessed when needed.

How Equity Credit Works

Like other forms of revolving credit, equity lines allow you to use the money when needed. Once you repay it, that money is again available to use. The home serves as the collateral. Many lenders set a fixed amount of time, such as 10 years, during which you can use a home equity line. Under some plans, borrowers must have the full amount of their equity lines of credit repaid when the loan term is up. Other lenders allow borrowers a term of up to 10 years after the credit line's term has expired to repay the full amount.

Amount of Credit Is Contingent on Home's Value

Lenders typically determine how much to lend by subtracting the balance owed on a mortgage from an amount equal to 75 percent of the home's appraised value. For instance, if a home is appraised at $100,000 and the borrower still owes $40,000 on his mortgage, the lender subtracts the amount owed from $75,000, 75 percent of the home's appraised value, and would then extend a line of credit of $35,000 to the borrower. However, in determining how much credit to extend, a lender may also consider a person's ability to repay. This means the lender may consider your income, debts and credit history.

How People Use Equity Lines

For many people, their homes are their most valuable assets. That's why many homeowners with equity lines of credit use them cautiously. Among the most common uses of equity credit are educational expenses, home improvements and medical bills.

How to Access Credit from an Equity Line

Once a lender has approved a home equity credit line, the borrower may receive special checks to access funds from the line. Other lenders may provide a credit card. Make sure you understand if any special conditions apply, such as minimum draw amounts. For instance, a lender may impose the condition that no less than $300 can be accessed from the equity line at a single time.

Things to Consider Before Applying for an Equity Line

The major consideration for a borrower considering an equity line of credit should be that failure to repay the loan could result in the loss of his home. For this reason, it's important to make sure prior to using equity credit that you have the means to pay it back. Also, note that just as you had to pay closing costs to purchase your home, you may incur costs by establishing an equity credit line. Since these credit lines tend to have variable interest rates, it's important to understand that the interest rate you had when you got the credit line may not be the same rate you have after you've used a portion or all of it.