Equity Line Of Credit

For the Homeowner with Continuing Money Problems, an Equity Line of Credit May be Dangerous

The price of a home in many areas is outrageously expensive. For many, it often takes two or three jobs and more than one mortgage to make the monthly payments. Because the market is so inflated, lenders are using more creative methods to help the "average Joe" to fulfill the dream of owning their own home. Often they start with a high interest (depending on their existing credit) loan at a variable interest rate, with the goal of refinancing at better terms in a couple of years. When the time comes, or if they have other reasons for a refinance, lenders often suggest an equity line of credit.

Basically, this means that they now have access to a percentage of the equity they've built up in the home. Rules vary by state and institution, but it's usually in the neighborhood of 85% of the home's value. That number is determined by an appraisal, just as with the first mortgage. The amount owing on the home is deducted and anything left over goes to your equity line of credit. It's treated like a checking or credit card account, as the homeowner writes checks or uses plastic to access the funds. This works well if the person is responsible with money; but for those with poor spending habits, it can be a disaster. Before they know it, they're in danger of losing their home.

In many cases an equity line of credit incurs the same charges as the original mortgage. The borrower may have to pay for a title search, appraisal, attorney fees, and points. Before signing anything, it's important to ask the mortgage holder about various extra fees. It goes without saying that they also need to fully understand the interest rate and if the mortgage is fixed or variable. If it's a variable rate loan and the rates are on the rise, they need to find out what the cap or highest amount they will pay is. It's also good to know if the loan can be converted to a fixed rate mortgage and when.

If you're considering applying for equity line of credit, do a careful review of your spending and credit habits. If you suffer from poor self-control and are on the verge of too much debt, you may want to rethink your plans. It may be better for you to refinance your home with a loan that gives better safeguards against using the money indiscriminately.

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