Equity lines are some of the most useful types of credit lines and loans available. Based off of the value of your home, these lines of credit have a lower interest rate than all major credit cards, a higher amount you can borrow against, and the ability for that value to grow over time as you work towards paying off the entirety of your home.
But as with all types of loans and credit, it is important you know everything there is to know about equity lines before choosing to utilize this financial tool. Below are some of the most commonly asked questions about equity lines to help you understand this valuable lending option.
Commonly Asked Question 1: Does My Credit Line Increase with Over Time?
The more of your mortgage you pay off, the more value your equity line will be. The amount you can borrow is a percentage of your home’s equity minus the remaining mortgage. As you pay off your mortgage, your available equity will increase.
Your equity line is also subject to the perceived value of your home. Your home will be appraised off of the current housing market. If the housing market is booming and your home has gained considerable value, your equity line will increase. But if the value of your house is lower, your equity line will decrease. Most equity lines will remain constant or increase by the time the application has expired.
Commonly Asked Question 2: What Do I Use My Equity Line For?
Equity lines are not designed to be used for minor purchases for several reasons.
- Most lenders require a minimum purchase of $300.
- Your equity line is based off your home’s value, so a default on your credit is a default on your home.
The risk of using your equity line haphazardly is substantial, so it is strongly recommended that you do not use it for small, optional purchases. However, if you require an immediate medical payment or need to cover the costs of tuition at a lower interest rate than most school loans, equity lines are a useful option.
You can also use your equity lines to finance the purchase of a second home, as well as pay for renovations to your home that can actually increase your home’s equity. Home renovations are a great use of equity lines because the value they bring to your home is often equal to or more than the money borrowed against.
Commonly Asked Question 3: What is the Difference Between an Equity Line and a Home Equity Loan?
Though it many ways home equity loans and home equity lines of credit are similar, they are not synonymous. A home equity loan is often a lump sum of money paid for up front for one significant purchase. They are often used by those without great credit for a single need, and they require repayment right away after the loan has been provided.
On the other hand, a home equity line of credit is available for constant use, and does not require you to draw from or use any amount – while allowing you to dip into it often. Home equity lines of credit also allow you to draw from your credit for as long as 10 years before the repayment period begins, though you may need to pay off the interest during that time period. An equity line, then, remains unused unless you decide to tap into it (Note: Interest will still accrue even if the equity line goes unused).
Another difference between the two is the interest rate. Home equity lines use variable interest rates that change year to year, whole home equity loans are generally fixed rate loans. Though the two are very similar, they do have some considerable differences.
Using Your Equity Line Wisely
As you can see, equity lines are very flexible financial tools that can provide you with a great deal of credit for any emergency purchases, large investments, or other items that require income that you do not currently have. They also have the ability to grow over time. But though they have this flexibility, they are not to be used wildly. Though they may be used for anything you need, your house is still put up as collateral, so you should only use equity lines when you are in immediate need of cash at a low interest rate.
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There are many different ways to borrow money, because most of your friends are not sitting around with thousands of unspent, unnecessary dollars at their disposal to lend you, chances are that you need to borrow money from a bank or private lender.
These lenders then need to leverage how much to give you for your loan, and at what interest rate. Both of these take into consideration your income, your risk (associated with credit score), their potential profits, the rates of the competition and the ability of the lenders to recoup their losses. It is for these reasons that it is easier to get a car loan of $40,000 than it is to get a credit line of$40,000 – if you default on your car loan, the lending company can repossess your car. If you default on your credit card, you may have eaten or used up all of the things you purchased with it.
When you are in the market for a loan, these aspects of lending affect how easily you can find the financing you need. In order to get the best available loan – with terms and payments that you can afford and an amount that meets your needs – you need to find a loan type that offers you the most leverage, so that lending agencies are able to offer you their lowest rate along with their highest loan value. One of the best ways to do this is by taking a loan against the value of your home, known as an “Equity Line.”
What is an Equity Line?
An equity line, also known as a “Home Equity Line of Credit,” is a line of credit that is taken on your house using the percentage value of the equity of the house and subtracting the balance remaining on the mortgage.
In numerical terms, an equity line would look something like this hypothetical scenario:
- Appraised value of home is $200,000
- Lender offers 80% of appraised value for their loans ($160,000).
- Mortgage owed is $100,000.
- Total available equity line of credit is then $60,000 (160,000-100,000).
This means that at any point in time, if you need to borrow money you have a $60,000 potential line of credit to borrow against, with that number changing regularly as your mortgage decreases. In a way, the line of credit is like a credit card whose value is based on your home’s value. Modern day equity lines provide you with checks to use at your leisure.
What Are Equity Lines Used For?
The most common uses of equity lines are major purchases, largely due to needs of recent life events. Because your home is used as collateral, because there is often a minimum amount borrowed, and because of the substantial risk of borrowing against your home, you should only use equity lines when you need to make major purchases, such as paying for school, fixing your car, making major house renovations or covering the costs of medical bills. Choosing to use the equity line for groceries is ill advised and also may not be possible depending on the minimum amount required by lenders.
Average Home Equity Interest Rates
Equity lines are usually variable interest rates. Fixed interest equity lines often carry roughly 3% greater interest depending on economic climate. Recently the interest rates for these lines of credit is 5% – much less than most credit cards and significantly less than unsecured loans. However, because these loans are variable, it is possible that the interest rates may rise higher than fixed interest rates, which could cause financial problems in the future.
Are Home Equity Lines Right For You?
If you have the cash on hand, it is always better to use out of pocket income rather than home equity lines, or any other type of lending option. But when you have financial needs that cannot be met with your own finances, a home equity line of credit is a low interest, high monetary way to borrow the money you need. It is perfect for unforeseen medical expenses or helping cover the costs of school, and though one should be careful to make sure you financially plan for taking out such a loan, they are a viable option for those looking for low cost borrowing.
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