Home Equity Line of Credit is like a credit card loan. That means that you can borrow money up to a certain level, based on your home equity.
How is Home Equity Line of Credit calculated?
In theory, Home equity limit is determined by the amount of money that you will have in your pocket if you sold your house today.
Here is an example:
- Current appraised value of your house:Â Â Â Â Â Â Â Â $150,000
- Less: 15% Margin for any depreciation:Â Â Â Â Â Â Â Â Â $22,500
- Less: Amount you owe on your mortgage:Â Â Â Â $27,500
- Your Home Equity Line of Credit:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $100,000
In the above example if you sold your house today, it will sell at a $150,000 and you still owe $27,500 for your mortgage, so the amount that is really yours, will be $122,500. To be safe, banks will reduce the available loan by a safety margin (15%, in our example). So, even if the price of your house goes down, the bank is cushioned.
The major factor determining the home equity line of credit is the market price of your house.
If the value of your house is goes up, you will have a lot more money available to you as your home equity line of credit. And if the value goes down, the available equity line of credit also goes down.
How is home equity line of credit like credit card debt?
Like credit card debt, home equity line of credit offers you a line of credit that you can access any time. So if your home equity line of credit has been determined as $100,000, you do not have to take out all the amount right at the start, or at specified intervals. You can use the money as and when you need it.
Your bank will extend this line of credit to you for a period of 10 to 15 years after which the terms and conditions will be renogitiated based on the market conditions.
Since a home is one of the biggest asset that most families have, the loan from a home equity line of credit should be used very carefully and wisely.