When you need to borrow money as an individual or as a businessperson, the interest cost is a major consideration. Equity lines of credit are popular options for a couple of reasons. By securing the loan with equity, you get lower interest rates. In addition, you only borrow and pay interest on what you need, as you need it.
Identification
An equity line of credit functions much like a credit card. In fact, lenders frequently issue a card for you to use when making purchases. Just as with credit cards, the money you spend is added to the balance of your line of credit. The main difference is that an equity line of credit is secured debt. You put up property as collateral for the debt. In return, you receive interest rates that are usually much lower than you have to pay on unsecured, credit card debt.
Features
In some respects, opening an equity line of credit is like taking out a second mortgage. You must have the property appraised and pay application and other fees. You may be assessed points and closing costs; although, these costs are typically much lower than for a conventional mortgage. Equity lines of credit also have a draw period. This is a time period of several years, after which you cannot make further purchases. You must repay any outstanding balance within a specified time. In addition, most equity lines of credit are fixed rate, but always check, because there are exceptions. Some lenders offer interest-only payment options. If you have an equity line of credit with this feature, keep in mind that, eventually, you must pay off the principal, and be sure you understand the terms of repayment.
HELOC
You may want to open a home equity line of credit (HELOC) to use the equity in your home to finance major expenses, like college tuition or home improvements. Your lender will determine the size of your HELOC based on the assessed market value of your home. Typically, a lender allows 75 to 80 percent of the property's assessed value after subtracting the balance of any mortgage on the property. The remainder is the credit limit for your HELOC.
Business Equity
In most respects, a business equity line of credit works much like a HELOC. However, lenders determine the size of the line of credit based primarily on the business's revenues and demonstrated ability to meet regular debt obligations. In practice, this usually means the business must be showing a consistent profit.
Considerations
Equity lines of credit clearly have the advantage of low interest rates compared to credit cards, plus, you can borrow only what you need. However, there are risks. For one thing, you must put your home or business property up as collateral. In addition, the lender can change the size of an equity line of credit under some circumstances. For example, if real estate values in your area fall, the lender may "freeze" your line of credit, suspending or revoking your borrowing privileges.
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