Having equity in your home is beneficial in more ways than just ownership of your home. Of course equity signifies that you are well on your way to owning your home free and clear. You should take a great sense of pride in the progress you have made toward owning your home. Many lenders allow you to take advantage of equity you have in your home in the form of a line of credit.
Many homeowners are using what is known as a home equity line of credit to borrow from the equity their homes for various reasons: taking a summer vacation, financing home improvement projects, paying off other consumer debt, and a host of other reasons. You can use a home equity line of credit in a manner similar to what you would use a credit card for. The major difference in that you receive a higher spending limit. The cost of the higher spending limit is your home.
A home equity line of credit, commonly referred to as HELOC, is fairly easy to obtain given you are credit worthy and have equity in your home. In many cases, you are able to receive low interest rates and other perks for obtaining a home equity line of credit. You are typically able to borrow up to 85% of the appraised value of your home less what you still owe on your home. For example, if your home is appraised at $100,000 and you owe $30,000 on your home, you can qualify for a home equity line of credit up to $55,000.
Obtaining a home equity line of credit is not much different from obtaining a mortgage. In fact, when you take out the line of credit, you are subject to many of the same closing costs as your initial mortgage. For example, when you close on your home equity line of credit you might have to pay an application fee, appraisal fee, attorney’s fees, title search, and points. As with a mortgage, negotiating these fees is key because ultimately the cost of your home equity line of credit is increased because of the fees. Ask your lender to detail the costs you are being asked to pay so you can better determine what to negotiate. Then, ask that one or more of the fees be eliminated or reduced.
You might be subject other continuing fees with your home equity line of credit. Since these fees vary by lender, you should inquire about them before obtaining the line of credit. Typical fees associated with a home equity line of credit include membership fees and transaction fees. These fees, as with the closing costs, increase the cost of your home equity line of credit.
As with mortgages and other loans, you should shop around for the home equity line of credit that has the best terms for you. This includes the interest rate you are charged, associated fees/costs, and repayment terms. Use each of these factors to make a decision on a lender.