The home equity line of credit, also known as HELOC is a loan usually taken out by many homeowners to cover major items such as education, medical bills or home improvements. For this type of credit, the lender agrees to lend the borrower a certain amount within a pre-arranged period (referred to as a term). The collateral for a home equity line of credit loan is the borrower’s equity in his or her house. Home equity credit is used by many homeowners because for many, the home is the most valuable asset they own.
A home equity line of credit is essentially a second loan taken out on a house after a mortgage. While the first loan i.e. a mortgage goes towards the purchase of a home, the second loan is given by the bank to be spent on other necessities.
An approval for a total loan amount is given by the bank for a home equity line of credit. However, the money is not given in a lump sum instead, a credit/debit card or a chequebook is used. Interest is paid on the amount taken out.
The financial requirement for a home equity line of credit is generally an interest-only minimum monthly payment. However, the borrower can make repayments of any amount which has to be more than the minimum payment and less than the outstanding one. At the end of the draw period, the full principal amount is due and must be paid either as a lump sum or according to a loan amortization schedule.
A home equity line of credit is different from a conventional home equity loan in that an upfront payment of the entire amount is not given by the lender. A line of credit is used instead to borrow amounts that equal to the credit limit allowed, just like with a credit card. A typical draw period (from 5 to 25 years) is given within which home equity line of credit funds can be borrowed and repayment is of the amount drawn, including interest.
An important difference between a HELOC and a conventional home equity loan is that there is a variable interest on the HELOC. The interest rate can therefore change over time because it is based on an index, such as a prime rate. Homeowners interested in a home equity line of credit need to be aware that all lenders do not calculate the HELOC margin using the same method. The margin refers to the difference between the prime rate and the interest the debtor eventually pays.
Homeowners can decide to either look for a traditional home equity loan which pays as soon as it is applied for, or a home equity line of credit which extends a line of credit over a period.
A conventional home equity loan is a better option for single, discrete expenses, for instance a home extension. The money is paid by the lender for use towards the project, and the borrower can begin making monthly payments until the total loan is paid off.
Home equity line of credit provides a safety net that can be used in time of an emergency, meaning the amount borrowed is the amount needed at a time. Also, payments can be made serially over a period of time.
In order to determine how much to lend, home equity loans and home equity line of credit use the following formula:
The amount owed on mortgage is subtracted from about 75 to 80 per cent of the value of the home used for the loan. Home value is determined by a paid appraiser who will visit and take stock of the home to determine its value. Successfully acquiring a HELOC during declining real estate values gets difficult. Nonetheless, a home equity line of credit for many homeowners is still an attractive option.
Since the loan taken out on a HELOC is smaller than on a mortgage, the fees involved in taking out a home equity line of credit are smaller too. It is necessary therefore to shop around for the best home equity line of credit deals available. Credit unions are also a helpful option to obtain better home quality rates.
The borrower is not obligated to obtain a home equity line of credit from the same lender handling his or her mortgage. Especially because there is no connection between the two. However the current mortgage lender might be willing to provide a better deal to an already registered customer.
The fine print on a home equity line of credit should be carefully studied as well. Some loans carry several conditions which need to be properly studied before a decision is made. Some lenders require a withdrawal of money, whether the borrower wants to or not, several times a year. In addition, a heavy penalty (called a prepayment penalty) may be admitted if the borrower decides to pay back the whole loan entirely and close the line of credit.
Preparing to apply for a home equity line of credit necessitates taking stock of all financial details. Certain factors are examined by a lender to determine eligibility and decide whether or not a home equity line of credit loan should be granted. Two of such factors are: credit score and debt obligations. Both factors are necessary for determining the interest rate applicable on each application.
Usually, all that is required for applying for a home equity line of credit is a home appraisal and an income verification. Income is first verified by the lender to make sure that the proposed monthly payments fit into the budget of the borrower before granting approval for a home equity line of credit. The process for approval of a HELOC is less strenuous than a mortgage approval process. A home equity line of credit can be acquired in a matter of weeks.
In recent times, online estate agents have grown in popularity, especially in the United Kingdom. A major reason for this…
A good ‘opportunity to buy’ property for first-time buyers in 2021.Since the housing market has started to slow down, it could be a good time to buy property for first…
Are People Happy With Cash For Home Companies?You may be in need of quick cash and might also have found someone who’s willing to buy your home,…
Why selling your house to a cash buyer is betterA “Cash buyer” or “Property cash buyer” is an individual or company who can close a sale on your house…
How much should I pay the estate agent to sell my home?Estate agent fees differ significantly: in highbrow locations it could cost more, and agencies don’t have the same fees. The…
From a mobile:
info@propertycashbuyers.com
www.propertycashbuyers.com
