What is an Equity Line of Credit?

When the money owed on a mortgage is less than the appraised value of the home, the amount left over is equity. Individuals are able to draw on a portion of this money with an equity line of credit. When people open a line of credit using the equity on their home, they're using their home for collateral.

Misconceptions

Equity lines of credit are sometimes confused with home equity loans or second mortgages. An equity line of credit is different in that the line of credit is revolving, meaning individuals can withdraw as little or as much cash from the credit line as long as there is money in the account. An equity loan or second mortgage is a one-time lump sum payment.

Facts

Banks typically lend 75 percent to 85 percent of the value of the home minus any liens currently placed on the property. For example, if a house appraises at $100,000 and a bank lends 80 percent of the value, the equity on the home is $80,000. However, if there is a current mortgage on the property for $30,000, the equity line of credit will come to $50,000.

Time Frame

Equity lines of credit have an expiration date. The time frame to withdraw money may be as little as five years or as long as 10 years. After the withdrawal time has expired, individuals may choose to close the account or apply for a renewal. Additionally, most banks allow individuals to repay the amount owed over a period of 10 to 20 years. Individuals should check the terms of their equity line carefully to ensure the full amount isn't due when the withdrawal period ends.

Uses

Home equity lines are used for big purchases that individuals otherwise would not be able to afford. People often use equity credit lines for home repairs, vehicles or travel. Additionally, some people use equity to consolidate other outstanding debts into one payment.

Considerations

Some equity lines of credit have a repayment plan that includes small monthly payments that cover the interest only, while other plans require higher monthly payments that go toward both the interest and the principal. Individuals shopping for equity lines should calculate interest rates, how long they have to pay the loan and any extra fees that may be included in the cost of the loan. Most banks charge fees for opening and closing a line of credit.

Warnings

Under most loan terms of agreement, a lender has the right to lower or freeze a credit line if the value of the home has reduced or they believe people's financial situation has changed, rendering them a potential credit risk. If this happens, an individual should speak with his lender to find out why the credit line was stopped. A frozen credit line may be reestablished if another appraisal on the property determines that the value of the home has not diminished.