Home Equity Line of Credit

A home equity line of credit is basically a loan against the equity in your home. It is for all intents and purposes a second mortgage. The bank who are offering a home equity line of credit will look at your homes value by having an appraiser value your home. If the appraisal shows that you have a large equity position in your home in relation to current market valuations for similar sized homes in your market area then the bank will commit to giving you a home equity line of credit in return for a lien against your home. This lien will be in the form of a mortgage.

Home Equity Line of Credit-How it Works

A home equity line of credit works similarly to a credit card limit. Based on the equity position you have in your home as per the appraisal the bank will decide on the dollar amount of the home equity line of credit. The home equity line of credit will be placed into a current or checking account which will have a debit card issued against it. Until you use your home equity line of credit there are no charges or interest charged against your account.

Also until you draw against your home equity line of credit the mortgage placed against your home will be for in effect zero dollars. In a home equity line of credit scenario the mortgage and note placed against your homes value are in theory revolving. They will both reflect the balance drawn down against your home equity line of credit.

Home Equity Line of Credit-Mortgage

This example will show how a home equity line of credit is secured against your home.

• Home equity line of credit issued by lender                                               = $100,000.00
• Balance of home equity line of credit remaining unused                      = $75,000.00
• Amount of home equity line of credit drawn down                                 = $25,000.00
• In the above scenario there is a mortgage against your  home for   = $25,000.00

The actual amount of money secured by your home in a home equity line of credit scenario will always be equal to the amount of the home equity line of credit that you have drawn down and used. If you use $30K then your mortgage is for $30K, If you use $90K then your mortgage will reflect this and will be for $90K.

Also remember that all interest and charges will be recorded as liens against your home.

Home Equity Line of Credit-Monthly Payments

The monthly repayments of your home equity line of credit will alter based of how much you have drawn down. If you have drawn down nothing then your payment will be basically zero.

In most cases the monthly repayments of a home equity line of credit will be amortized over a 30 year period although come products will be for an interest only payment.

Home Equity Line of Credit-Danger

A home equity line of credit is first and foremost a mortgage. Most people do not understand what a mortgage actually is. When you take out a loan from any source you will in effect be giving a note in return for the money advanced. A note or paper is basically an IOU which you give to the lender. A Note is a bearer instrument and is transferable which means that the holder of the note can sell it to anyone they want to sell it to. You will owe the loan amount to the note holder.

Certain debt like credit card debt is unsecured; this means that if you default there is little the creditor ca do other than reporting your default to the credit reporting agencies.

A mortgage is a security instrument designed to protect a note. In the case of a home equity line of credit the item used to protect the note is your home.

The mortgage will lay out the remedies available to the note holder should you default on the terms of the note.

Almost all loans that are secured by property the remedy for default is the auction of the property. This means that if you default on your home equity line of credit the lender or note holder will have the legal right to foreclose on your home and evict you from it.

 Home Equity Line of Credit-Can You Afford It

Just because you have equity in your home doesn’t necessarily mean that you are in a financial position to borrow against it. Your friends at work or other family members might think that it is a great idea but if you spend this money and can’t afford to meet the monthly mortgage payments you will lose your home. Repeat you will lose your home.