Are you in the market for credit? If so, a home equity plan is one of the options you may want to consider. Many lenders offer home equity lines of credit (HELOCs). However, what is it and what you should know about home equity line of credit? How does a HELOC work? What should you look for when shopping for a plan?
Before you decide whether to apply for this type of revolving credit, read on and find out everything you should know about it.
What is a home equity line of credit?
A home equity line of credit is a revolving source of funds, where your home serves as collateral. Many people confuse HELOC with mortgage loans, but they are different. Mortgage loans are used for one purpose only- to purchase a home.
On the other hand, HELOCs can be used for different purposes, which don’t necessarily have to be related to real estate. Your home is used as collateral to secure the money you borrow. Since homes are usually the most valuable assets that people own, HELOCs are typically used for paying college tuition, medical bills, home renovation, etc.
If you have a $100,000 HELOC, for example, you can borrow up to that amount at an adjustable interest rate. If you never use more than $20,000 of the HELOC line, you will only pay interest on the $20,000 you borrowed, not the $100,000 that is the maximum value of the line.
How does a home equity line of credit (HELOC) work?
When you apply for a HELOC with a lender, they will consider your property’s market value, how much equity you have in your home, your income, credit score, and any outstanding debts. After the lender reviews everything, they will prepare an offer.
Generally, banks may extend credit up to 80% of the property’s value, minus the outstanding mortgage. For instance, if the property’s value is $300,000, and you, as the borrower, have the outstanding $200,000 mortgage, you may qualify for a $40,000 HELOC.
Once approved, you may receive a HELOC card or checks that you can use with the HELOC line.
When it comes to the terms of a HELOC, they vary. However, it’s important to know and understand all the terms and conditions and to know all the relevant information before you sign the agreement.
Borrowing and paying
Before you enter the agreement, think about the way you’re going to repay the money you plan to borrow. You should know that you don’t have to use the entire sum available to you. It means you can just borrow money as needed.
There are two important phases of HELOCs: the first one is the so-called draw period – the period during which a borrower can take out the money. During this period, monthly payments must be made, and they are usually interest-only.
The other period includes the repayment of the principal and any interest.
Furthermore, you have to know your pay-off date because that’s the time by which you must pay the HELOC balance or your home will be foreclosed.
There may come a time when extra money will be necessary. If this happens, a home equity line of credit may be a good option for you. Since this type of loan is secured against your property, lenders may be willing to offer lower rates than for other types of unsecured loans.
Some of the main points of what you should know about home equity lines of credit are summed up in this article. Should you have any questions, feel free to contact our experts at Prudential Bank at 215-755-1500 (NMLS # 518005). With this type of loan and Prudential Bank, you’ll always have cash available when you need it!