Home Equity Line Breakdown

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Home Equity Line Breakdown

By: Thomas Smith

Home Equity Line of Credit in a Nutshell

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 this 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 line 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-meaning the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

Appraisal of home $100,000

Percentage x75%

Percentage of appraised value


Less mortgage debt


Potential credit line


In determining your actual credit line, the lender also will consider your ability to repay, by looking at your income, debts, and other financial obligations, as well as your credit history.

Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the plan may allow you to renew the credit line. But in a plan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance. Others may permit you to repay over a fixed time, for example 10 years.

Once approved for the home equity plan, usually you will be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks.

Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some lenders also may require that you take an initial advance when you first set up the line.

What Should You Look for When Shopping for a Plan?

If you decide to apply for a home equity line, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan. The disclosed APR will not reflect the closing costs and other fees and charges, so you'll need to compare these costs, as well as the APR's, among lenders.

Interest Rate Charges and Plan Features

Home equity plans typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate); the interest rate will change, mirroring fluctuations in the index. To figure the interest rate that you will pay, most lenders add a margin, such as 2 percentage points, to the index value. Because the cost of borrowing is tied directly to the index rate, it is important to find out what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate for home equity lines-a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable-rate plans limit how much your payment may increase, and also how low your interest rate may fall if interest rates drop. Some lenders may permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan. Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to get additional funds during any period the interest rate reaches the cap.

Costs to Obtain a Home Equity Line

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example:

A fee for a property appraisal, which estimates the value of your home.

An application fee, which may not be refundable if you are turned down for credit.

Up-front charges, such as one or more points (one point equals one percent of the credit limit).

Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes.

Certain fees during the plan. For example, some plans impose yearly membership or maintenance fees.

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed. On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

How Will You Repay Your Home Equity Plan?

Before entering into a plan, consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest alone during the life of the plan, which means that you pay nothing toward the principal. If you borrow $10,000, you will owe that entire sum when the plan ends.

Regardless of the minimum payment required, you can pay more than the minimum and many lenders may give you a choice of payment options. Consumers often will choose to pay down the principal regularly as they do with other loans. For example, if you use your line to buy a boat, you may want to pay it off as you would a typical boat loan.

Whatever your payment arrangements during the life of the plan-whether you pay some, a little, or none of the principal amount of the loan-when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this balloon payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.

With a variable rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a plan that calls for interest-only payments. At a 10 percent interest rate, your initial payments would be $83 monthly. If the rate should rise over time to 15 percent, your payments will increase to $125 per month. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement calls for keeping payments level throughout the plan.

When you sell your home, you probably will be required to pay off your home equity line in full. If you are likely to sell your house in the near future, consider whether it makes sense to pay the up-front costs of setting up an equity credit line. Also keep in mind that leasing your home may be prohibited under the terms of your home equity agreement.

Comparing a Line of Credit and a Traditional Second Mortgage Loan

If you are thinking about a home equity line of credit you also might want to consider a more traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time. You might consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges. You cannot, however, simply compare the APR for a traditional mortgage loan with the APR for a home equity line because the APRs are figured differently.

The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges.

The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

Disclosures from Lenders

The Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. And in general, neither the lender nor anyone else may charge a fee until after you have received this information. You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term has changed before the plan is opened (other than a variable-rate feature), the lender must return all fees if you decide not to enter into the plan because of the changed term.

When you open a home equity line the transaction puts your home at risk. For your principal dwelling, the Truth in Lending Act gives you three days from the day the account was opened to cancel the credit line. This right allows you to change your mind for any reason. You simply inform the creditor in writing within the three-day period. The creditor must then cancel the security interest in your home and return all fees-including any application and appraisal fees-paid in opening the account.

Reward yourself for your good credit!

No lump sum at close of Escrow! You may use the money for remodeling, college, vacation, investments or money needed over a long period of time. You have access to your credit amount through checks or credit card. Your payment is based on the outstanding balance for any month (Not on the entire credit amount!). The money you pay back can be used over and over again. You can also use the money for the first 5 years (draw period) and must be paid back during the last 10 years (payback period).

You interest rate is adjustable based on prime +. During the draw period, you can make a minimum payment of 1% any month. In the pay back period, the full rate is paid. This is especially great if you need some cash but plan to pay off the loan in less than 5 years because you will pay less interest during that time!

Good credit scores are usually required - because of the risk.

About The Author

Thomas Smith

Find other useful information, mortgage tools and an easy way to request mortgage quotes fast. Everything you need to make the right financial choices.



carolyn m 01.09.2007. 02:26

How can I get a line of credit with poor credit score? I'm a homeowner, no equity, need home repairs, high debt ratio and want to pay off my bills. What company would give me a line of credit; credit score low 600's. Need help now.

carolyn m

Admin 01.09.2007. 02:26

If you lend someone your hard earned money out of the kindness of your heart -- you expect to be paid back. Right? Imagine you lend your friend or your mom $5000? Would you be upset if they didnt pay you back? I would bet that you would probably not be very happy -- I'd even go so far to say that you would complain to them and continually harass and remind them until they paid you back... Ah, now put yourself in the position of a bank who lends to thousands of people. If nobody paid them back the bank would lose a lot of money and go out of business. So when you ask can you get a loan with a low score, it leads me to believe that you don't understand how the credit score system works.

Banks lend money to people for a small fee which is usually a percentage of the overall loan. This is how they profit from loans and can continue to stay in business. However when someone doesn't pay their loans back in a timely manner, the bank loses a lot of money. When a lot of people aren't paying their loans back they run into all sorts of problems! And so for banks and other lenders to make sure they can stay in business and continue to offer loan products, a credit scoring system was developed to rate people based on the likelihood that they will be pay their loans back. People with lower scores have lower scores because their credit report has a history of missed or late payments. Enough of these entries on your credit report and not only will you have a low score but you will immediately make yourself look like a high risk to a bank with little chance of return -- and in effect banks and lenders will not lend to you. So if you want a loan, the trick is to show that you can handle it. One way to do that is demonstrating that you have enough income to pay your loans in a timely manner. Primarily, however, to make yourself look even more attractive to a lender -- e.g. they will make money from you and not lose money -- showing that you are responsible with your bills and debt is the only real way -- and that is reflected in your credit score.

There are very few companies who, especially now will lend to people with poor credit ratings, and the ones who do are usually scamming people which in turn puts them in a worst position.

The best thing to is build your score -- it doesn't take long for short term changes like account balances, payments, and available credit to show up on your credit report and effect your score -- likely these are the things to have impact over the short term, and you have a better change of fixing your score if you try to address one of those issues, which you can do easily in a matter of weeks.

Here are my 10 steps you can use to build your credit score quickly. I raised mine to well over 700 points fro 500 using these steps in less than a year:

1. Know and Track Your Credit Score (be sure to sign up for the free trial of your credit score monitoring listed on the article below. It really helped my get my score up.)
2. Never Miss a Payment, Starting Today
3. Never use more than 20% of your Available Credit
4. Keep Credit Cards that Have No Annual Fees Open For as Long as Possible
5. Extend Your Credit Limit on Cards You Already Have before You Get New Ones
6. Get Credit Cards that Have CashBack Rewards to Contribute to your Balance
7. Transfer Your Balance to a Credit Card with a Lower Interest Rate and a Higher Available Credit-
8. If You Think You Are Going to be FORCED to Pay a Bill Late Ask for an Extension or Payment Plan
9. Take out a Small Personal Loan and Repay it Over a Year
10. Ask Someone With Good Credit if They will Account Shadow you

When you're trying to build a solid credit score it's important to get a comprehensive view of what is actually effecting it...

Your Credit Score (also known as your MyFico score) is calculated with the following breakdown:

* 35% - Payment History
* 30% - Credit to Debt Ratio
* 15% - Credit History
* 10% - New Credit
* 10% - Credit Types in Use

If you excel in one area and lack in another, only fixing the areas which you lack are going to improve your score.

How Can I Increase My Credit Score

* http://millionster.com/articles/debt/ask-1mil-how-can-i-increase-my-credit-score/

Take a couple of months to boost your score just enough to get you back on track to getting the loan you need for your repairs!

Good luck!


Heather Nicole 01.04.2007. 03:37

how much auto insurance do you really need? like do you need medical or pip, all that extra stuff?

Heather Nicole

Admin 01.04.2007. 03:37

Depends on your assets, future assets and what state you are in. In California and Utah, the courts are now allowed to award the following: everything but $20,000 in equity in your home, savings and any other liquid assets, AND up to 1/3 of your wages for up to 10 YEARS. You should discuss this with your insurance agent, if you have one.
What most people don't know is that once your insurance company has fulfilled their oligation in the accident, they are no longer required to provide you with legal council. They will only fight for what they have interest in. So, on top of what your insurance isn't covering, there may also be legal fees that go with the court case.

Here is a quick breakdown of what coverages mean to you, and then you should decided what is needed for your situation.
BIPD (bodily injury property damage) this may be split into two lines on your declarations page. BODILY INJURY is usually written with one amount per person, and one amount per incident. (25/50 or 25,000/50,000) The first amount is the maximum that the insurance would pay out for one single person that you injured. The second amount is the full amount that the insurance would pay out per accident for others. So if you were driving along and hit a car that had Johnny, Mikey, and Sue in it and Johnny had 30,000 in medical bills, Mikey had 25,000 in medical bills and Sue had 15,000; then the insurance would pay out Johnny $25,000 (your responsible for the remaining $5,000) Mikey's bill would be paid and then you could be responsible for Sue's bill.
PROPERTY DAMAGE- This is how much the insurance company pays out for the other person's vehicle. Take a look around town, see how many cars you think are more expensive than $ 15,000 (or whatever your property damage limit is). This also takes care of any actual property (buildings, signs, that stuff)
PIP- personal injury protection/no-fault medical- this is a requirement in some states. In most accidents, this has to be exhausted before your personal medical insurance will pay out. This pays for your vehicle's passenger's medical regardless who is at fault. Even if you have Health insurance, you aren't always going to verify that your passengers have it.
UM-UNINSURED MOTORIST- this is to cover your medical (and any of your passengers) if the idiot that hit you didn't have insurance. I recommend it to anyone who is any bit concerned with their limits of liability because the same thing applies here. If you had your friend in the car, and you are hit by someone that doesn't have enough to cover her medical, then she can come after you too.
UIM-UNDERINSURED MOTORIST- this is if you take the situation in BI and you are now Sue. This would take care of your medical up to whatever you have on your policy. This coverage is beneficial, because the insurance company will go after the other person to recover the money that they paid out on your behalf.
UMPD-UNINSURED MOTORIST PROPERTY DAMAGE- this allows you to get some money for your vehicle in the case of a PROVEN uninsured driver, not an unknown driver (hit and run or parked car) Not needed if you have Comprehensive and collision.
COMPREHENSIVE- otherwise known as "other than collision". This is an amount you pay to get your vehicle fixed if you hit an animal or if damage is done to your vehicle while legally parked,and the damage is not by another vehicle.
COLLISION- This is an amount you pay to fix your vehicle when your at fault in an accident, or when the other party doesn't have insurance.
RENTAL CAR- I recommend this if you have one car in the household, or if you are unable to do without a car while it is in the shop. You may choose to put money away in a savings account instead of choosing this coverage.

There are other coverages that you can add on, but they vary so much by company to company, that you should discuss them with your agent.
FULL COVERAGE- this doesn't mean that you are fully covered for an accident no matter what. This simply means that you have coverage for your own vehicle to be fixed, and for the other parties to get SOME compensation. How much depends on your liability limits.

Hope that helps! Buttrfly (Insurance CSR for 5 years)


senzualsindhique 16.05.2008. 05:50

How exactly does investing in Real Esate with a home equity line of credit work? I have heard many stories and lectures of using one's equity to invest in property. I am still trying to breakdown the numbers because even if i put 10 percent down from my HEloc, i have that loan, a mortgage on the property, taxes, insurances, and any other fees for one property. Hopefully my rent will cover all these expenses but i might be negative. so what exactly is the strategy for this. please let me know. all ideas welcome, my property mortgage is 400,000 and its value is 750,000. how can i maximize my equity?


Admin 16.05.2008. 05:50

There are several ways to invest in property. However, today's market is not for the newbie. You need to know how to do market research, be able to analyze path of progress data, understand the market you are investing in, have a good attorney, which is easily the biggest challenge since they all think they know real estate, be a marketing specialist to get a good deal, be able to negotiate with sellers, be able to fix up and repair, stage and finally sell your home to realize your return. And when you have finally mastered that, you are going to have to be an expert at managing cashflow.

You also do not want to be putting ten percent on anything if you have to come up with the other 90% as collaterlized loan unless, as you rightly point out, you can come up with the cash flow to cover two mortgages. the other problem is that if you catch the investment bug, you will find that this strategy will not work when traditional lenders cut your supply of money off after a few houses.

I think the solution you are looking for is how to invest your money from your equity line and gain a higher return on the money the equity line is costing you and still be safe. Why not become the bank? As an investor, I am continually buying, and pay extremely high interest rates because the availability of money is what is important to me. Your loan would be secured by a recorded mortgage at 65% of fair market value, which means that not only do you make a high return on your money, but you also have the guarantee of having a property with lots of equity in it as collateral.

email me if you would like to chat more about investing.



zeus2quincy 28.08.2007. 19:13

Help, please?!? We took out a $55,000 home equity loan and now are in the process of paying it off.The problem is,I'm making payments that is only covering the finance charges and my balance is never going to go down in this scenario.What can you suggest to help? Maybe a lender that won't place a finance charge?


Admin 28.08.2007. 19:13

First, verify what type of home equity product you have. Is it a fixed rate home equity loan? A home equity loan with interest only payments for a specific time before fully ammortizing? Is it a home equity line of credit? I have seen some clients who were under the impression they took out a home equity loan only to find later they actually had a line of credit.

For now, I'll assume it is actually a fixed rate, fixed term, fully ammortizing home equity loan.

If that is the case, you need to realize that long term loan ammortizations (such as mortgages and home equity loans) are set up such that the majority of the amount you pay in the early years of the loan go to interest or finance charges and only a small portion of the payment goes to principal. Later in the loan terms, more of your payment will go to principal and less to interest. For an example of this, go to http://www.bankrate.com/brm/calculators/mortgages.asp and plug the numbers from your loan into the mortgage calculator (loan amount, initial loan term, and interest rate.) After you calculate, it should be close to what you are paying monthly. Then click to show the ammortization schedule and you can see how payments are broken down between interest and principal and also how that breakdown changes over the life of the loan.

If this does not answer your question, message me and I can make other suggestions.

P.S. There is no such thing as a lender that won't charge finance charges on a home equity loan. That is how they make a profit on the loan. All you can hope for is to minimize the finance charges by finding the lowest interest rates and loan fees.


the optimist 07.09.2012. 13:26

What good is all that wealth that the 1% has if they don't spend it? Everyone says the wealthy earned that money. But they never said just how they earned it. We need to get more money into the hands of the people who will spend it, and spur the economy.
The Vicious Cycle of Stagnant Wages

?By Kevin Drum

Here's my capsule view of the great financial meltdown of 2008: For the past couple of decades, the benefits of economic growth have gone almost entirely to the rich. But the middle class still wanted to prosper, so the rich loaned them money to continually improve their lifestyles. That worked for a while. And then it didn't.

This is a fairly idiosycratic view, and obviously not the whole story. And although plenty of economists have condemned growing income inequality and years of middle class wage stagnation, none of them (as far as I know1) have explicitly given it a share of the blame for the economic collapse of 2008. But via Mike Konczal, I finally have a credentialed ally. Take it away, Raghuram Rajan:

In a new book he is working on, entitled ?Fault Lines,? Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The financial industry, with encouragement from the government, responded by supplying home-equity loans, subprime mortgages, and auto loans....The side effects of unrestrained credit growth turned out to be devastating-a possibility that most economists had failed to consider.

Like anyone, I'm pleased when I find someone to confirm my prejudices. And this is definitely one of them. Growth in a modern mixed economy2 is fundamentally based on consumer spending, and middle class consumers can increase their spending in only three ways: (1) real wage growth, (2) borrowing, or (3) drawing down savings. Only the first is sustainable. So if we want the American economy to grow consistently over long periods, we have to focus our economic machinery on median wage growth. We've done it before, we can do it again if we're smart, and the result would be good for everyone: the rich would get richer, the middle class would get richer, and the poor would get less poor. The alternative is booms, busts, and continued social erosion. So let's be smart, OK?

1This is, obviously, a pretty big caveat. But I'd be delighted to hear that I'm out of touch and lots of serious economists have made this case before.

2A democratic one, anyway. In a culture ruled by the wealthy classes, growth can be sustained pretty much any way that the wealthy classes want ? and needless to say, this is a disturbingly accurate description of the past few decades. As long as the helots don't complain, though, it can continue for a surprisingly long time.
I did not say give it. If you had read the link provided you would be a bit smarter.

the optimist

Admin 07.09.2012. 13:26

To long.

You can't post a bunch of facts and think they will accept reality.
It is laughable!
They think that the world is 10,000 years old and people rode dinosaurs. They believe dragons lived.

No really.

I thank you for posting this but it needs to be shorter and sharper.


Aaron 05.07.2010. 08:19

Advice needed - my wife left me and my daughter through her choice, what rights does she have over our home? My wife recently left me and I now live in our mortgaged house with my daughter and I am now paying the mortgage on my own.

My wife still has a front door key and I went away for the weekend. I didn't want her going through the house when I wasn't there so left the key in the front door so she couldn't get in. I didn't think she'd try to get in anyway but she phoned me up shouting down the phone that it's her house as well and should be able to come and go as she pleases.

My wife walked out of the relationship, it was her choice. I don't deny that she still has a financial interest in the house but surely she doesn't have the right to go browsing through my home in my abscence?
Hi, thanks for your answer. My daughter still lives with me and I receive Child Benefit for her.
Thanks for the answers, I'll have to try and get a solicitor. I had no problem in her coming into the house (it was only the other day we were drinking coffee and laughing with our daughter). I'd just like to know that my wife isn't in the house reading all my mail and going through my stuff when I'm not there.
Sorry if my question is confusing, it was wrote at a time when my head was spinning.

I live in the north of England.

My daughter is mine and the wife's.

Both me and the wife are on the deeds.

I'm not going to go into details but the wife left through her choice and this decision was made suddenly without any prior arguements etc.

There's no chance of reconciliation.

There is no reason for her to come into the house as she has already collected all her belongings, the only possible reason for her to 'need' to come into the house is to retrieve her post.


Admin 05.07.2010. 08:19

Your question is confusing for several reasons.

First we don't know where you live. What jurisdiction you're in.

Second we're unclear as to whether the daughter is yours or yours with your wife.

Third we're unclear as to who's on title, who's on mortgage and such.

Now finally, because you've said you're hiring a solicitor I am assuming you're in a commonwealth country. I will also assume you're probably under the family law of England & Wales.

In England there has to be an irretrievable breakdown in the marriage or desertion, adultery, separation by choice for 2 years or without consent for 5. There is also unreasonable behavior, which is another story.

Bottom line is, it isn't enough that she walked out. She has to walk out and literally mean she's not going to reconcile with you, or you her.

Now changing the locks and keeping her out may be permissible for a short time, until you get a court order; but likely she has a right to retrieve her things.

Also, I would have to say, it also depends on what kind of stake she has in the house. If she has none and it was yours to begin with, with no particular equity on her part its possible you can get interim orders giving you possession.

Fault in England may factor into all of this.

Now if you're not in England I have no idea.


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