Basics Behind Home Equity Lines of Credit
A home equity line of credit is similar to a 2nd mortgage loan that uses the existing equity in your home as collateral. HELOC loans have become popular in recent years with the extremely low interest rates that have existed in states like California, Florida and elsewhere. A borrower's home is likely to be their largest asset and therefore is used as collateral for large purchases, including home improvement, car purchases, medical expenses and education costs.
Once approved for the home equity loan or line of credit, usually you will be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks.
California Home Equity Mortgage Loans
On the plus side, Florida and California home equity mortgage loans are convenient and easy to use. If a borrower has a sizable amount of equity in the property, they can take out a home equity line of credit to be used just like cash available to use when and how they please. In addition, the interest paid on a home equity loan may be deductible due to the fact that the debt is secured by your residence -- a significant tax savings over other types of debt such as credit cards.
On the con side, California home equity mortgage loans can get some borrowers into trouble. Because it is so easy to use a line of credit, many borrowers pull out most, if not all, of their equity from their homes in thriving markets. The problem comes when the housing market cools and the price of homes decreases. Now, the borrower has more debt than the original loan amount.
Before deciding on whether to take out a California or Florida home equity loan, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And, remember, failure to repay the line could mean the loss of your home through foreclosure.
Credit Liimts on HELOC mortgage loans
Many mortgage lenders set the credit limit on a home equity line by taking a percentage (75 percent is a reasonable estimate) of the appraised home value and subtracting the balance owed on the existing mortgage. The lender will determine the limit by considering your ability to repay, income level, existing debt, financial obligations and credit history. An example of credit limit is as follows:
Home Appraisal - $200,000
Percentage or 75% in our example
Percentage of appraised value $150,000
Less mortgage debt -$120,000
Potential credit line $30,000
Home Equity Plans
Home equity plans often set a fixed time for the borrower to use the home equity line, often 5 or 10 years. At the end of this period, the borrower can renew their home equity line of credit. Some plans do not allow you to borrower additional monet at the end of the plan. Some home equity plans require the borrower to pay the balance of at the end of the plan. Still other plans allow the borrower to repay over a specified number of years.
Bad Credit Home Equity Loans
California bad credit HELOC loans may be availble to certain borrowers. A bad credit home equity loan is going to almost certainly have a higher interest rate than a typical HELOC. Borrowers must weight the higher interest rate before deciding whether of not to use the money.