Home Equity Line of Credit

A Home Equity Line of Credit can be a useful source of inexpensive credit.  With a home equity line of credit, the borrower can access the amount of money they need by writing a check against the line of credit account held by the lending institution.  The advantage of writing a check against a line of credit makes this approach more flexible than home equity loans.

The amount of equity in a home is determined by taking the current market value of the home and subtracting all of the outstanding loans that are using the home as collateral.  If a home is worth $300,000, and the remaining principal on a loan is $100,000, then the equity in the home is $200,000.

The lending institution will usually allow the borrower to take out a loan of up to 80% of the equity in a home. In this example, the borrower could get a loan as large as $200,000 x 80% or $160,000, if their annual income qualifies them for a home equity line of credit for that amount. Most home equity plans set a fixed time, known as a draw period, when the borrower can make withdrawals from their account.

Another advantage of a home equity line of credit is the interest portion of the payment is usually tax deductible.  Keep in mind, however, that a home equity line of credit is a secured loan using your home as collateral.  If loan payments are not made, foreclosure is possible.