Home Equity Line Basics
A home equity line of credit may be a good vehicle to consider if you need money for college, home improvements, debt consolidation or other financial goals you might have. However, a home equity line is structured differently than a home equity loan.
A home equity line is a revolving credit amount that is secured by your home.
Determining the Potential Home Equity
First, you want to see if there is any money available to borrow. To determine this you need to know how much your home is worth (an appraisal will be the final word on this), multiply it by the percentage the bank will lend up to and subtract what you still owe from that amount.
$200,000 home value
X .80 (80% of the value)
$160,000 available to borrow
-$60,000 what you owe
$100,000 is the potential line of credit
Home Equity Line Interest Rates
Home equity loans are established with fixed interest rates. That way you will pay a set amount of principle and interest each month. It’s very similar to your mortgage payment.
However, a home equity line is usually established with a variable interest rate. It’s typically tied to a public index like the U.S. Treasury Bill Rate. This means the interest rate will change each year. There is usually an introductory low rate for the first six months. Also, a cap is placed on how much the interest rate can increase over the life of the line.
Some lenders may offer, at some point in time, the option to convert to a fixed rate or even change the line to a fixed term installment deal.
Accessing the Money
When you have a home equity loan, you get all of the money right away to use as planned. You also pay interest on that entire amount.
With a home equity line, however, you access the money when you need it. Interest accrues only on the amount that you borrow. For example:
- You’ve established a $50,000 line to pay for your daughter’s education. In the first year, the amount needed comes to $12,500. That’s all you have to borrow and that’s all you have to pay back with interest.
A home equity line of credit can be good if you want the security of having ready money available but you want to use it only when absolutely necessary to achieve the financial goals you have set for yourself.