Your home may be a hidden source of wealth for you. A Home Equity Line of Credit (HELOC) might be the best way for you to access that wealth. One of the big differences between a home equity line of credit and other types of loans is that you don’t have to borrow the entire amount. You get approved for a credit limit and then you use either a checking account or a credit card to draw on that line of credit.
When deciding how big of a home equity line of credit you will be able to open, you first need to determine how much equity you have in your home. You need to remember your home’s equity isn’t based on what you paid for your home but on what the house is valued at. For example, if you purchased your house for $150,000 and you currently have a mortgage for $120,000 that gives you $30,000 in equity.
Where this can get tricky is if real estate prices have gone up in your area. Using the example from above, you owe $120,000 on your home, you purchased it for $150,000, but it is currently valued at $200,000, that means you have $80,000 in home equity you will be able to draw on.
If you are considering a line of credit you might also look at taking out a second mortgage or refinancing the entire amount. The interest rates on second mortgages are generally lower than on a home equity line of credit but they are higher than the rates on primary mortgages.
When you shop around for your refinance loan be sure to count all the costs before you decide on a lender. Some additional costs such as attorney fees, filing fees, title search, taxes and insurance can add to overall cost of the loan.
If you take out a second mortgage or a home equity credit line generally you can borrow for up to 75% of your equity. So if we continue with the example above, your equity is $80,000 and you could borrow up to 75% of that, $60,000. The amount you can borrow is your credit limit.
The annual percentage rate (APR) on a line of credit is calculated a little differently from a traditional second mortgage. The APR for a home equity line of credit is based on the interest rate alone and does not include points or other charges. The APR for a traditional second mortgage loan includes the interest rate charged plus points and other finance charges.
One point is equal to 1% of the amount of the credit line. Points can be folded into the total loan amount.
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