If a homeowner wants to borrow money, they can take out a personal line of credit. The line of credit will be borrowed against the equity in their home. There are several types of home equity lines of credit. The main difference between each type is the frequency of the interest charges to the homeowner.
Occasionally a home equity personal credit line will come with a variable interest rate. This means the homeowner will not necessarily always know how much their monthly interest or mortgage payment will be. The monthly interest amount can change from time to time and is usually based on the rate set by the Federal Reserve Board.
What Are the Interest Rates for a Personal Line of Credit?
Sometimes a home equity line of credit lender may offer borrowers a low introductory rate. These are usually very attractive interest rates, however, they hide the reality of the higher rate which the homeowner will have to pay later. Before accepting a line of credit offer, make sure to carefully read the credit terms. Make sure you know exactly how much you will be repaying, not only in the beginning, but into the future.
Another difference between the different types of personal credit lines is the cost of applying for the loan. Some offers for a personal line of credit can come with a substantial up front fee. Other lenders may offer a lower application fee or no fee, but they may add fees and charges which would affect the continuing loan costs.
What Fees Can Be Involved in Home Equity Lines of Credit?
A lender can tack various fees onto a home equity line of credit, including a balloon payment. A balloon payment is a large payment demanded after a specific period of time. Some lenders while eliminating the balloon payment, may instead request that the borrower pays a higher monthly or annual loan payment.
The differences between the various types of home equity lines of credit can be confusing to a lot of homeowners. That’s why some homeowners find it better to consider alternatives to a personal line of credit. These alternative solutions may include taking out an extra mortgage or setting up a personal that does not use the equity in your home as collateral.
Do You Have to Use Your House As Security?
If you want to apply for a personal line of credit, you do not have to use your home as collateral. However, if you do not use your home for security, then you need to seek out a personal loan provider. These lenders may offer you a line of credit based on your personal credit score or by using another form of collateral such as a car.
If you own vacant land in an area where land values are appreciating, then you may be able to use this as collateral for a personal line of credit instead of using your primary residence. If you own a business, you may also consider using your business as collateral. However, if you don’t want to risk your residence for a home equity line of credit, you may also be hesitant to risk your business.
A home equity credit line is a power tool. Used wisely, a homeowner can use the equity in their property to borrow the money they need, without risking their property or damaging their credit.
Let’s start off by saying that home equity lines of credit are rather effective instruments for a number of people. These individuals use their home as collateral and get access to a revolving line of credit that has a variable rate.
The specific word “equity” in the larger phrase “home equity line of credit” can be defined as follows: take the amount that is still outstanding on the mortgage of your home and subtract it from the market value of your same home. The difference is the equity within your credit line. It’s not very different than having a credit card in your wallet that features a very high credit limit but a rather low interest rate.
One critical point to always consider is that a line of credit built on home equity is not a conventional loan. Home equity lines of credit are very similar to home equity loans, but there are subtle variations between them that can prove substantial in impact.
This Isn’t Your Usual Home Equity Loan
A home equity line of credit isn’t like your usual home equity loan since it doesn’t stipulate a set amount of money that you borrow. Choosing between the two is really just up to you and what you want. Having said that, one benefit of a home equity line of credit over home equity loans is that the approval process is a little looser. Especially in terms of requirements that has to be met.
The primary advantage of a home equity line of credit is that you have serious influence over your cash flow. You have a recurring ability to dive into your home’s equity when you need the cash. This line of credit revolves continually, so you can borrow what you absolutely require when you actually need it instead of getting a lump sum that might be too big or just a one-time thing when you get a home equity loan.
If there are a number of home renovations you are thinking about, or just a number of large expenses or purchases coming up, then you might benefit from a home equity line of credit. Taking out such a line can prove beneficial if you need occasional infusions of cash at amounts you decide on at the time, rather than getting everything lumped up just at once.
Terrific For Ongoing Recurring Bills
It’s a terrific method of paying for any bills that come up regularly. You can also use it to make additional rooms, a car, or even a college education a possibility.
Home equity lines of credit are very powerful tools for homeowners that choose to put them in their financial toolkit. Homeowners that qualify can use them to finance practically anything they need or desire. Paying off credit cards with high interest rates is a good idea, as is improving your home or sending a child off to college or university.
Only Pay Interest on What You Borrow
An additional benefit is that these lines of credit can be left to sit idle until you actually need to tap it. Once you get approval, you only take out money when you need it. That means that the only interest you pay is on the money that you actually borrow. That can mean savings of hundreds to thousands each year on interest alone. Home equity lines of credit are efficient because you only get hit with interest after you tap your credit line, and again only for the amount you borrow.
While home equity should not be a substitute for emergency funding or a rainy day reserve, establishing a home equity line of credit can still make your financial picture smarter overall. The risk is that if you miss enough loan payments to default, you risk losing your home.
Should You Get A Home Equity Line Of Credit?
Some homeowners find home equity lines of credit to be useful financial resources to have at their disposal. The popularity of this choice is growing among many homeowners who cringe at the thought of second mortgages or refinancing.
Preapproval is also very popular, and if you want to learn more, there are a number of sources, online and off, about getting a home equity line of credit.
An HELOC is a line of credit that comes from the equity in a home, and you will understand this better if you separate out the two terms; line of credit and home equity.
* Line of Credit – This is the line of credit that comes from any arrangement made with a lender or a bank who will extend credit to a specified amount to any borrower for the time agreed to.
* Home Equity – This consists of the value that your home will have if it goes on the market, less any debts that are registered or associated with it.
Does This Make it a Giant Credit Card?
When these two are combined; home equity and line of credit, this then gives you a revolving credit that assumes the equity you have in your home, as collateral. Whenever you have a need for additional finance, you can draw on, and then you can arrange for funds through this line of credit. You need to stay within the credit limit, but this allows you to arrange the funds that you need for expenses like medical bills, tuition fees and improvements for the home.
The use of any money that you get from this line of credit that is secured by home equity must be done sparingly. The money should only be used to pay for things that are important. This need for caution comes from the ultimate risk that is associated with this financial option.
Foreclosure – The Ultimate Risk
When you are unable to pay your dues against this financial option, it can result in foreclosure of the home you probably live in, and this is a universal fact associated with mortgages all over the world; in Australia or elsewhere. That is the reason you need to make sure that dues are always settled, as and when they are due. You can always choose the pay the minimum due, but this is not a wise thing to do. It will then make it impossible to reduce the amounts that you will have to repay, and try to make sure that the payments you make on a monthly basis cover more than the basic rate of interest.
When you have a line of credit that is based on home equity, it is the market value of your home that determines how healthy your credit is. If for any reason, the lender feels that the value of your home has decreased, or they are left with a feeling that you are not in a position to honour your promises of monthly payments, they can choose to reduce your credit limit, or in extreme cases can even freeze the account.
You will need to talk with your lender if you have to face any one of these two situations. You can find out from them how you can restore your account. This may require you to prove that the value of your home has not decreased. You must also be able to convince them of your ability to make payments as when they are due. Your arguments will be strong if you can prove what you are saying. Documentation can lend authenticity to what you say.
If your negotiations with the lender do not solve the problem that has arisen, you have to look at other alternatives to get the required line of credit. This must be with the best mortgage rates. If you are lucky in making these alternate arrangements, you can repay of your earlier line of credit and replace it with a new one. Obtain any clarity of anything that you do not understand from people who know of these things. There are many professionals who know about mortgages and lines of credit and will be able to help you.
How Can This Be Avoided?
Lines of credit in Australia have been a simple way in which individuals are able to access money which is secured by their personal homes. However what were to happen if the lender were to cancel that line of credit? How can this situation be avoided?
How does a Line of Credit Work?
A line of credit makes it possible for an individual to gain access to their homes equity to borrow at home loan rates for whatever purpose is needed. Your equity is merely the balance of your home’s worth and what i still owed on it.
We hope that over the years that value of your home increases, so even if a significant amount of the loan has not yet been paid off, the home’s equity and real worth will have increased.
Although obtaining a line of credit may be a successful way in which your debts can be consolidated at interest rates which are low, a line of credit could also cause you to not pay very much off of the main loan and eventually even falling behind.
Keep in mind that every time your line of credit is accessed, whether it be to take a trip with the family or purchase a new vehicle, the equity on your own home is being worn down.
Three Reasons Why Your Line of Credit Could Be Revoked
- If the Application Was Not Filled Out Honestly
If all relevant details which could have an affect on the decision to lend the money were not fully disclosed to the lender, in this case the facility could most certainly be withdrawn. There are times in which people make the value of the property larger than it is or perhaps exaggerate their ability of being able to pay back the loan through personal financial conditions. If these misinterpretations come to light, the line of credit could immediately be revoked.
- You Go Beyond Your Credit Limit
Many times it seems as if for some borrowers, the temptation of easily being able to access funds is too big. There are those who are not able to control how they spend and must have their repayments altered in a way that they can more easily meet them, there are also situations in which unfortunately, the credit is completely withdrawn because of the bad account conduct.
- What if Your Circumstances Change Dramatically?
Almost every kind of loan document insists on the borrower informing the lender if there is any change in the financial situation which could have an affect on being able to pay the loan back. In cases which are extreme, this may be bankruptcy related or if the main provider has been imprisoned or died. If these circumstances are not promptly communicated to the lender, they may begin cancelling the loan.
Standard Terms and Conditions
Many loan documents may contain a common clause which states as follows:
“Refusing to provide further credit at any time without first notifying you is something we may choose to do. Your credit limit may also be reduced or canceled at any moment without prior notice. If the credit limit is cancelled you may be asked to pay the pending balance in full immediately.”
What Can Be Done If a Line Of Credit Was Cancelled?
If the unlikely event of having the line of credit revoked were to occur, depending on the reason the loan was revoked there are three options that can be considered:
- Have the Line of Credit Promptly Converted Into a Standard Loan
If you are able to meet the loan criteria, this is the best option especially if the lender is willing to waive any establishment fees as well as costs upon termination.
- Refinancing With a Different Lender
This may be a very difficult if not impossible option which will vary depending on each situation. However, the financial market is in constant change and many new products that will fit your personal needs may arise.
- Get Rid of the Security Asset- the Home
Obviously this would be the worse option and is usually played out when there are no other possibilities. This is only done if mortgage refinancing due to the significant drop in a home’s value or if all equity which is available via a line of credit prior to the facility being withdrawn has been used up. This is when a lender that will lend more then the worth of the home cannot be found.
It is crucial to know and understand all terms and conditions associated with a line of credit, this is especially true when what is in play is your home. Before entering these kinds of agreements it is important to know where you stand and any areas of uncertainty must be fully discussed prior to proceeding. A line of credit can be a very useful asset to your financial state, but as with any loan you should always practice discipline and restraint and steer clear of temptation.
The Final Resort: Claiming Bankruptcy
By going bankrupt you are relieved of all your debts, this however should really be the last resort. This generally means that over a period of three years you are bankrupt. There will be many restrictions on what you will be able to own and anything that has real financial worth , an inheritance for example, will immediately go to your creditors.