If you are seriously considering taking out a home equity line of credit loan, there are four important things you should know about this option before making your decision. This article will explain what a home equity line of credit is, how it puts your home at risk, how it compares to a traditional second mortgage and how a home equity line of credit is repaid. Armed with this information you can make your decision wisely.
Understanding a Home Equity Line of Credit
A home equity line of credit is essentially an open ended loan in which the borrower’s home serves as collateral. The borrow is granted a maximum amount they are allowed to borrow under the home equity line of credit and may borrow up to this limit at any time during the draw period. In defining the maximum amount for the line of credit the lender typically considers the value of the house as well as the borrower’s ability to repay the loan. The funds borrowed during the draw period may be used for any purpose but popular reasons for opening a home equity line of credit include education, home improvement projects and medical expenses.
A Home Equity Line of Credit Puts Your House at Risk
Home owners considering opening a home equity line of credit should take care to ensure they fully understand the repayment terms and are confident they will be able to repay all of the money they borrow. This is important because the borrower’s house is used as collateral and defaulting on the loan can put the home at risk.
How a Home Equity Line of Credit Compares to a Traditional Second Mortgage
A traditional second mortgage allows the homeowner to borrow a set amount of money at one particular time and repay the loan in installments over a fixed period of time while a home equity line of credit allows the homeowner to borrow money, up to the maximum, as needed during the draw period.
Repaying a Home Equity Line of Credit
Repayment options vary for home equity lines of credit. Some plans allow you to pay interest and a portion of the principle in monthly installments while others allow you to repay interest only but require a balloon payment for the total amount borrowed when the plan ends.
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