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What Is A Home Equity Line Of Credit And How Does...

If you own a home, you've probably heard of a home equity line of credit before. It will cover what a home equity line of credit is, how it works, and how to qualify for one of your own. What is a home equity line of credit? Since HELOCs are secured by your home, meaning that the lender can foreclose on you if you decide not to pay back the loan, they often come with better interest rates than most traditional credit cards. You also will likely only have to make payments on the interest accrued by the amount that you borrowed. Now, your monthly payment will likely go up substantially because you'll be responsible for repaying both the principal and the interest on whatever money you borrowed during the draw period. Most lenders will only let you borrow against up to 85% of the equity you have in your home. Finding your maximum credit limit works like this: It's the amount your home is worth x the percentage of home equity you're allowed to borrow - how much you owe on your home For example: Let's say your home is worth $300,000 (according to a recent appraisal) and you're allowed to borrow up to 85% of your home equity, but you still have a $100,000 balance on your mortgage. $300,000 x 0.85 = 255,000 $255,000 - $100,000 = $155,000 In this case, you'd be approved for a $155,000 line of credit The difference between a home equity line of credit and a home equity loan Home equity lines of credit and home equity loans are similar in that they are both second mortgages on your home, but they function in different ways. Unlike the continuous line of credit that comes with a HELOC, home equity loans work in much the same way as your first mortgage.