A home equity plan is a viable option if you’re thinking of obtaining extra credit. But, it is crucial to note that if you default on your repayments, plus the interest, you could end up losing your home. Wasatch Peaks Credit Union shares more information below:
What Exactly is a Home Equity Line of Credit?
A home equity plan is a type of revolving credit where your house acts as your collateral for the loan. Since most borrowers’ consider their house as their most valuable and expensive asset, they only use their home equity for other equally important things which usually include medical bills, paying for their children’s education, or for home renovations.
When you open a home equity line of credit, the lender will give you a specific credit line amount. Typically, lenders will loan you 75% of your property’s appraised value and your credit will be calculated like this:
Most current appraised home value: $400,000
75% of your home’s current value: $300,000
Your mortgage amount: $250,000
Your credit amount: $50,000
When lenders determine your specific credit limit, they’ll also factor in your capacity to repay your loan, along with interest and the principal. This is done by assessing your monthly income, credit rating, and other financial responsibilities.
How Does a Home Equity Line of Credit Work?
Plenty of home equity plans establish a fixed time period, usually 10 years, during which you can withdraw your loan credit and simultaneously pay off your loan. On the other hand, some lenders will require you to repay the remaining outstanding loan balance at the end of the 10 years. Once this period ends, you have the option of renewing your credit line, while some plans don’t offer renewals.
When your application for a home equity line of credit has been approved, you may be capable of borrowing money whenever you have a need for it. Some lenders will allow you to borrow a set amount every time you withdraw from your credit line ($300, for example) or maintain an outstanding minimum amount. There are also lenders that will require you to obtain an initial advance once your credit line has been properly set up.