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What Is Equity? What You Need To Know About Home Equity Credit
What is equity? If you own a home, and need a new line of credit, a home equity plan is an option that could be right for you. A home equity line of credit is a type of revolving credit, where your home serves as collateral. Because a home is such a valuable asset, many homeowners only use home equity credit lines to pay for major expenses, such as education, home improvements, or medical bills. When you take out a home equity line, you will be approved for a certain amount of credit. While deciding your credit limit, the lender will consider your ability to repay the loan (both principal and interest) by looking into your credit history, income, debts, and other financial obligations. You can often get an idea of what you'll qualify for by using a mortgage calculator. In addition, some home equity plans have a fixed period during which you can borrow money, such as 10 years. When this "draw period" ends, you can renew the credit line if allowed. If your plan does not allow renewals, however, you won't be able to take out additional money once the period is over. Some plans may even call for payment in full of any outstanding balance at the end of the period, while others may allow repayment over a fixed period called the "repayment period". What should you look for when shopping for an equity plan? If you want to apply for a home equity line of credit, look for the plan that best meets your needs as an individual. Go over the credit agreement carefully, and examine the terms and conditions, including the annual percentage rate (APR) and the costs of establishing the plan. Be sure to compare several lenders before deciding which plan is best for you. Often when setting up a home equity line of credit the costs are similar to those you pay when you buy a home. You may have to pay a fee for a property appraisal to estimate the value of your home, an application fee--which may not be refunded if you are turned down for credit--and closing costs which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, and taxes. All these can add up quickly, and you could find yourself paying hundreds of dollars just to establish the plan. However, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the costs of establishing and maintaining the line. Another important thing to consider when taking out a home equity line of credit is that plans typically allow lenders to freeze or reduce a credit line if the value of the home declines significantly or if the lender reasonably believes that you will be unable to make your payments due to a drastic change in your financial situation. If this does happen, talk with your lenderand find out what caused the lender to freeze or reduce your credit line and what you can do to restore it. In some cases, you may be able to restore your line of credit by showing proof that your house has retained its value or that your financial circumstances have not changed. Get copies of your credit reports to ensure that all the information in them is correct. If your lender still refuses to restore your line of credit, shop around to see what other lenders have to offer. You can usually pay off your original line of credit and take out another one. Remember though that you may need to pay some of the same application fees you paid for your original line of credit. Before making a decision about taking out a home equity line of credit, you should always weigh the costs of a home equity line against the benefits. Shop around to find the credit terms that best meet your borrowing needs without posing any undue financial risks, because failure to repay the amounts you've borrowed, plus interest, could mean the loss of your home. |
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