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A home equity line of credit is a revolving credit line
that uses an individual's home as collateral. The individual
is given a credit limit based on a percentage of the appraised
value of the house minus the remaining balance of the
mortgage. It would work something like this:
Appraised value of home $100,000
Percentage x 75% (example purposes only)
Percentage of appraised value = $ 75,000
Subtract balance owed on mortgage - $ 40,000
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Potential credit $ 35,000
There are other factors that determine the credit limit
that is granted to an individual. These factors include:
- Ability to repay the loan
- Debt to income ratio
- Credit history
If any of these factors are not satisfactory, one can
be denied a home equity credit line.
The term of a credit line is determined by the lender
and can be fixed. An individual might have a certain amount
of years in which they can access funds in the credit
line. These terms differ and are subject to different
restrictions.
A term can be renewable or not. A lender may require
full payment of outstanding balances before the term can
be renewed. A repayment term is an alternate method to
the full payment of the outstanding balance. A repayment
term is issued for a fixed number of years. Access to
a home equity credit line come in different forms.
Some lenders will issue special checks for an individual
to use. While others issue credit cards or debit cards
to draw from the account. Whatever the method, one should
be aware of the limitations on the account. Some accounts
have withdrawal limits that will prevent withdrawing more
than a certain amount in a given time period and others
may have early re-payment penalties.
If some of these stipulations are violated, there is
a possibility that the account could be frozen until the
lender is able to verify the transactions. A minimum account
balance can be required to avoid additional service charges.
This being said, be fully aware of the requlations on
your account before you start spending.
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