A home equity line of credit is a type of loan in which the moneylender lends a certain sum of money, within a stipulated time frame, on the basis of the equity associated with the borrower’s home, which acts as a collateral.
The home is often the most important and valuable asset that a person has,
and hypothecating it to the loan provider can turn out to be risky, since the creditor can liquidate the house if the borrower defaults upon the loan repayment. That is why individuals generally prefer to avail these types of credit facilities, or a similar Line of Credit for more important issues such as education, paying medical bills, or even major home improvement plans, rather than to meet day-to-day expenses.
How a home equity loan works
The loan basically helps to tap the extra potential available with the home. Generally, when a mortgage loan is taken out the mortgage amount is decided upon the valuation that is carried out for the guarantee or the collateral provided by the loan applicant. Usually the house acts as the guarantee for the credit facility. Moneylenders maintain a certain reserve while calculating the mortgage loan amount, and depending upon the Annual Percentage Rate (APR), always pay the applicant an amount that is less than the actual cost of the house. Mortgage loans generally extend for many years. When a house is mortgaged, it cannot be mortgaged again for another mortgage loan, unless the ongoing mortgage loan is paid off. So it is not possible to avail an addition sum of money from the same house offered as collateral. Now it so happens, after a couple of years, the property appreciates in value, and the house becomes more expensive.
So its worth increases, and if a new valuation is done on the house, its current potential to draw a higher amount from the mortgage increases. In simple words, the maximum limit of money that can be obtained from the mortgage loan increases with the passage of time, and this "extra" potential can be tapped to bring in more money. The lender provides an additional loan by using this "extra" potential available in the home. This is how Home Equity Lines of Credit (HELOC) work. If one wants to know how to apply for home equity line of credit, this article tries to provide some information related to home equity that can be useful to the applicant.
Applying for an Equity Loan
Banks generally decide upon the equity loan amount by deducting the sum of money still owed on the mortgage, from a new valuation amount that is obtained by a fresh appraisal carried out regarding how much the homes worth currently. So if the new appraisal decides your home is worth, say $100,000, and you still need to pay $75,000 to your existing mortgage lender, your home equity loan amount would be $100,000 - $75,000 = $25,000, depending upon the APR selected by the lender. It is very important to know that in most cases the lender would not consider the exact appraisal amount difference, i.e. in the above example if you have a potential of $25,000 on your home, the lender will finance a sum less than $25,000. Generally banks and credit lending institutes offer between 75% to 80% of the appraisal difference amount in the form of home equity loan. Another important factor deciding the maximum loan amount is your credit history and FICO score. The better your credit ratings are, the greater the loan amount you stand to avail.
Difference Between HEL & HELOC
The difference between HEL and HELOC is that, you can avail an average in HEL (Home Equity Loans) and pay offer over a exacting period, whereas HELOC loan (Home Equity Line of Credit) is which you can avail amount as per need with a limit and payback has to be done within specific time. The advantage of HELOC Loans obscure that of HEL but lastly it lay on the situation and the opinion of loan applicant. So if you do not have good credit ratings, it is recommended to go in for a credit repair program and subsequently apply for your home equity line of credit.
