If you ever watch television or read magazines, you have definitely come across companies who offer home equity lines of credit to home owners and if you own your home and thinking of a purchase, you may be thinking about looking into this type of situation. Before you do, however, it is important that you know a little bit about the process in general, as well as what you can expect from working with a company that offers home equity lines of credit. Here is some information that can get you started:
What is a Home Equity Line of Credit, Exactly?
A home equity line of credit is a type of credit line that is directly based on the equity of your home. For instance, you may owe $250,000 on a home that has a value of $4000,000. In this case, the equity of your home would be $150,000. That means, when you apply for home equity credit, the lender will be able to approve you up a maximum percentage of the value of your home or as referred in the lending community the CLTV or Combine Loan to Value. If the maximum CLTV was 90% or $360,000 ($400,000 value Xs 90%_, the maximum line of credit would be $110,000 ($360,000 less the $250,000 1st mortgage) . These lines of credit are a bit different than a home equity loan, something that you may have also heard about. With a loan, a home owner will receive a lump sum with a fixed rate, but with credit, you can use up to that amount, and it will have variable rates.
How Can You Get the Money Then?
Once you have been approved for a home equity line of credit, you may be wondering how you can access your money. Generally, you will treat this line of credit like you would any other credit or even like a bank account. Some lenders will give you a credit or debit card, others an actual check book that you can use to get cash. There may be minimum draw amounts such as $5,000 or $10,000 and a maximum amount of times the line can be drawn annually. Some credit lines offer a hybrid feature allowing for certain draw amounts to be paid on a set schedule. This is a perfect option for purchasing a 2nd home or investment property as the repayment terms change to a fixed repayment only on that designated portion of the line extended.
The Downside
Though this might sound great, there are some downsides. For one, you may be charged a prepayment penalty if you close your account early. Most of the time, these accounts will be approved for 10 – 25 years. Though you can have a balance of $0 and be fine, if you actually close the account, you can be facing a penalty of $500, on average. Some credit lines will even charge you an annual fee if you do NOT use the line for an extended period of time. Other times they may close your credit line without notice, if the bank needs to free up their own capital for other loans, which could leave you in a desperate situation if you actually needed the credit line. It is important to read the fine print, consult with your attorney before signing anything. Credit lines used in combination with a 1st mortgage for the purchase of real estate or those used for home improvement may have tax benefits. Always consult your tax advisors for the most current regulations. Learn more about the process by contacting a lender or advisor, today.
(We do not do Equity Lines on Real Estate @ CSS – maybe:)) If the concept of an equity line is appealing but there is insufficient equity or qualifying barriers, contact Capital Solution Services for other options to access capital.
