Home Equity Credit Line

A home equity credit line is an amount of money a lender can give to a homeowner which uses the equity in the home as collateral. Home equity credit lines are different from equity loans in a number of small, but important and distinctive ways. This difference should be kept in mind if you’re trying to figure out which one to go for.

Greater Flexibility Over a Longer Period

A home equity credit line works like the credit line of a credit card in that you have a maximum amount of money to draw from, but you can take out as much or as little as you want at a time up to the maximum limit. This gives you greater flexibility over a longer period of time, but is also dangerous because like a credit card, it can be harder to get out of. However, unlike a credit card, there is a set number of years in which the credit line has to be paid back, so you end up having to pay a minimum monthly and then at the end of the term, the full amount you are still owing on the credit line with interest.

Interest Might Go Up

The interest on a home equity credit line is also not fixed, unlike a home equity loan which often has a fixed interest rate. A home equity loan goes by the prime rate of interest which can change without warning and do change over time, often going up rather than down (although not always; sometimes it will go down). Since you have to pay back a minimum with interest tacked on, this uncertainty in the interest rate may worry some people, especially those on a tighter budget.

Cheaper Than a Credit Card

Home equity credit lines are popular though for a couple of reasons. The interest on them is usually tax deductible, making them cheaper than a credit card or other loans. Equity credit is also seen as more desirable to have than a second mortgage or equity loan because ‘loan’ or ‘mortgage’ makes people think of debt. In truth however, lenders consider home equity credit lines to be a second mortgage as well and file it as such.

Home equity credit lines proved how dangerous they were in the collapsed real estate market in America over the last few years. Because they are easy to get and you can name your own terms, basically, including how much money you want on your credit line, people were getting credit lines which were actually worth more than the house the credit line was taken out on. Then when it came time to sell the house, the homeowner would have to pay back the loan in its entirety which meant that the owner would have to try to sell the home for more than it was worth. This would usually fail and the owner would probably have to foreclose and go bankrupt. A lot of people were falling into this trap, causing mass foreclosures all over the country for a time.

Useful When Used Responsibly

This type of credit line can be very useful when used responsibly because it is using the equity in your home and making it work for you instead of simply sitting there. It can also be nice to have money you can access any time over the term (five to thirty years) instead of being handed a lump sum which might be gone in a few months. It’s all in how you use it and home equity credit lines are all about letting you use your money how you see fit, making them very popular.

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