Use Your Equity to Improve Your Equity

By Emily Kerr
Loan page Columnist

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Need to finance an education, make home improvements, or pay off medical bills? Your home is your biggest asset, and a home equity line of credit allows you to borrow against your equity.

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A home equity line of credit can be a useful source of funds, but it does require you to use your home as collateral, so most people use it only for major expenses, such as home improvements, which in turn increase the home's equity.

What Is a Home Equity Line of Credit?

A home equity line of credit is a specific amount of credit based on the equity in your home. Some lenders go up to 75 or 85 percent of the appraised value, less the amount still owed on your existing mortgage.

A home equity line of credit is an ongoing credit line. Once you've been approved you should be able to borrow up to your credit limit whenever you need to. Ask your lender what system is used for accessing the credit line--some lenders use special checks, others use credit cards. Also ask whether there is a specific minimum or maximum withdrawal amount.

How Do I Repay a Home Equity Line of Credit?

Most credit lines have variable interest rates, so when interest rates change, so do monthly payments. Some credit lines have fixed draw periods that allow renewal when the period is up, but others require full payment of the outstanding balance. If you are unable to make this payment, you could risk losing your home. If you sell your home, you will be required to pay off the entire credit line in full.

Cost of a Home Equity Line of Credit

There are costs associated with establishing a home equity line of credit. Look over terms and conditions carefully, including the annual percentage rate and costs to establish the plan, which can include:
  • » application fee;
  • » title search;
  • » appraisal (to determine your equity);
  • » up-front charges;
  • » attorney's fees;
  • » points (a percentage of the amount you borrow);
  • » closing costs, including title search or mortgage preparation; and
  • » transaction fees for using the credit.

If a home equity line of credit is right for you, you just may be able to use your home to finance home improvements.

Sources

Choosing A Loan
About Home Equity
Improving Your Home

About the Author

Emily Kerr is a freelance writer with more than 350 articles in print. She writes about topics from construction to home loans, technology to education and everything in between.

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