Equity Line of Credit
A combination of a line of credit and equity loan secured by real property. A maximum loan amount is established based on credit and equity. A mortgage is recorded against the potential borrower’s property for said maximum loan amount. The potential borrower has the right to borrow, as needed, up to the amount of the credit line.
A home equity line of credit is not the same as a standard home equity loan. The difference is that with a conventional loan, you would be provided with the entire amount of the loan to use for whatever purpose it was borrowed. On the other hand, the equity line of credit loan is literally a line of credit, much like a credit limit set on a credit card. When you want to use some of the money, you would take it out of the established account, which would decrease the amount available.Now, with a home equity line of credit, lenders would set up what is known as a “draw period.” This timeframe, which is anywhere from five to 25 years is the time in which you could pull money from the account to use. In addition, some lenders will set up a loan of this type with minimum monthly payments, with the payments typically being interest only. In most cases you would be permitted to make a payment in any dollar amount but only if it were more than the agreed upon payment. However, you want to read the terms of the loan carefully in that often there is a hefty penalty for paying the loan off earlier than scheduled.
With a home equity line of credit, you would also find that at the end of the draw period, regardless of its duration, the full principal amount would be due. Depending on how the loan was set up, this could be in one lump sum or balloon payment, or based on an established amortization schedule. In other words, for a period of this type of loan, the payments being made would only go toward the interest on the loan with the actual principle amount borrowed against the equity in your home would be paid at the end of the loan.
You will also find another difference between an equity line of credit and standard loan. With the equity loan, interest would be variable. Usually, the amount of interest charged would be based on an index, perhaps the prime rate. With interest being variable, it means there could be some fluctuation with market movement due to various economic changes. It is essential when looking for the best home equity line of credit that you understand that the way in which the margin, which is the difference between prime rate and interest you would pay, is calculated varies from one lender to another.
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