WHAT YOU SHOULD KNOW ABOUT
HOME EQUITY LINES OF CREDIT
More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable
amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax
law - depending on your specific situation - you may be allowed to deduct the interest because the debt is secured by your
home.
If you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be better.
Before making a decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit
terms that best meet your borrowing needs without posing undue financial risk. And remember, failure to repay the amounts
you've borrowed, plus interest, could mean the loss of your home.
WHAT IS A HOME EQUITY LINE OF CREDIT?
A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a
consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements,
or medical bills and not for day-to-day expenses.
With a home equity line, you will be approved for a specific amount of credit - your credit limit, the maximum amount you may
borrow at any one time under the plan.
Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home's appraised
value and subtracting from that the balance owed on the existing mortgage. For example,
Appraised value of home
$100,000
Percentage
x75%
Percentage of appraised value =$75,000
Less balance owed on mortgage - $40,000
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Potential credit
$35,000
In determining your actual credit limit, the lender will also consider your ability