Home Equity Line of Credit – How Does a Home Equity Line of Credit Work | Requirements and Rates

Have you ever been in a negative situation before, I mean in a situation where you need financing as soon as possible? Then you might want to consider a home equity line of credit. This type of loan can be used for credit card debt consolidation and other heavy expenses, and most home equity lines of credit come with very low interests.

Home Equity Line of Credit

Home Equity Line of Credit 

For the financial novices reading this article, I am going to drop a proper definition of a home equity line of credit. This article would cover everything related to this topic. So, stick to the end.

What is a Home Equity Line of Credit?

This term also known as HELOC is a type of loan that is secured by your home and gives you a revolving credit line to use for large expenses and also consolidates high-interest debts on some other loans like credit cards. Generally, HELOC offers lower credit than some other types of loans.

How Does a Home Equity Line of Credit Work?

With a Home Equity line of credit, your loan is taken against your available equity in your home. your home is used as collateral for your loan. much like a credit card. The amount of available credit is replaced as you pay back your loan. i.e. you can borrow against it again if you need to, and you can borrow as little or as much money as you need throughout your draw period which is about ten years, up to the credit limit you create at closing. At the end of this draw period, the repayment period begins, which will most likely last for up to 20 years.

Home Equity Lines of Credit Requirements

The first thing to note is that you have to have available equity in your home before applying for a HELOC. meaning that the amount you owe in your house must be less than the value of your home. You can borrow up to 85% of the value of your home without the part that you owe. Other things that lenders consider are your credit score and history, your employment history, your monthly income, and monthly debts, just as when you first got your mortgage

Home Equity Line of Credit Rates

Home Equity line of credit has two types of rates, variable, and fixed rates.

When you have variable rates on your HELOC, your interest rates can change from month to month. Variable rates are calculated with both an index rate and a margin.

for a clearer understanding, an index is a financial indicator used by most banks to set rates on many consumer loan products. Index rates can move up or down.

Another component of the variable interest rate is the margin. A margin is added to an index, and it is constant throughout the life of the Home Equity Line of Credit.

Fixed Rates on the other hand are stable and predictable. They can protect you from rising interest rates. Some Lenders including the Bank of American offer you an option to convert a portion of your variable interest rates to fixed rates. These are the rates for a home equity line of credit.

Calculate Home Equity Line of Credit

Home Equity Line of Credit requires a particular bundle of payment to the lender. This payment includes the repayment of the loan and the monthly interest on the outstanding balance.

Some of these credits allow you to make interest-only payments for a defined period of time. After that, you can start the main repayment period. Some platforms offer a Home equity line of credit calculator, with this calculator, you can determine how much your payments will be at the end of every month. You can take a look at the bank of America Home Equity line of credit calculator.

Best Home Equity Line of Credit

There are so many organizations which you get this line of credit from, some of them include:

  • PenFed.
  • Bank of America.
  • US Bank.
  • Alliant.
  • State Employees Credit Union.
  • Wells Fargo

You visit these financial institutions to get started. You should also note that the Home Equity lines of credit requirements differ for different banks.

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