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Home Equity Line of Credit Loans
The line of credit home loan (also called a home equity line of credit) allows homeowners to borrow against the amount of equity built up in their property. Essentially this loan functions like a credit card. However, your property is on the line should you default on the loan.
Those with unpredictable income find this to be a good option. Money is available to property owners when they need it, and they do not need to use the credit if their finances are good. Some investors find this sort of a good way to make sure money is available when they need it.
Perhaps you wish to do a crucial home renovation, or you want to use the equity in your home to make a deposit for an investment property. No matter what reason you have, borrowing money is almost a fact of life.
If you have reasonable equity in your home, a line of credit home loan may be worth considering. To understand better, let us talk about the definition of this type of loan.
What is a Line of Credit Home Loan?
A line of credit is an agreement that you have made with your lender. This agreement gives you access to a certain amount of credit that you can access whenever you need it. Any money you borrow would be secured against your current home equity.
Here is an example. If you borrow $300,000 from a bank to purchase a home, you may be asked to give a deposit. Let us say the deposit is $50,000. At this point, your equity now is $50,000. After ten years, you have managed to lower your debt to $170,000.
During this time, the value of the property also increased to $450,000. All in all, your equity has reached $280,000. If you have met the lending requirements of your lender, you can take out a loan against the equity you have on the house.
Line of credit is the most common type of home equity loan. You are undoubtedly familiar with how a credit card works. The good news is that this type of loan works almost the same way. You have a pre-approved limit that you can take out, and you can borrow it when you need the funds. The interest will be paid on the balance of the loan.
Should You Opt for a Line of Credit Home Loan?
A big advantage of this type of loan is that you can use your property as collateral or security. It lowers your risk as a borrower as perceived by your lender. Since you are considered a low-risk borrower, you will only have to pay a lower interest rate compared to other types of loans out there.
Here is the problem with the line of credit home loan though. If you have issues repaying your loan, especially because of unforeseen circumstances, you could lose your equity. At the same time, it will be much harder to get back to repaying the loan. The worst-case scenario is that you could end up losing your home, particularly if you continue to delay the repayments.
You should always consider your situation before you get any loan. A line of credit home loan may appear simple. However, your choice of applying for it depends on the debt that you put towards it. Also, you should think about the other debt options you may have. A line of credit can usually be utilised to consulate debts, such as credit cards. It can be an expensive strategy if you do not pay off the loan on time, though.
Other Facts about a Line of Credit Home Loan
- Unlike other traditional types of loan, a line of credit is a revolving loan. You can access the money whenever you need it. It does not mean, however, that you can get all the funds you require at once. Since it works like a credit card, you will have a set amount that you can take, along with a draw period. Therefore, you can only borrow money at a specific time, which can take several years.
- A line of credit home loan can come with two types of the draw period. The first one is where you can pay both the interest of the loan and the principal amount. The repayments here are much higher than the other type, which is the interest-only draw period. It means that you will only repay the interest at a specific period.
- When you repay the principal loan, the amount you provide to it will go back to your existing credit line. Therefore, you can borrow it again. It helps that you can pay down both the principal and interest so you can pay off your loan faster.
If you are ready to take a line of credit home loan, contact Quantum Finance today.
Pros of Line of Credit Home Loans
- The loan gives the opportunity to invest by having funds available
- Borrowers will pay less interest on a line of credit loan than on credit cards or other personal loans
Cons of Line of Credit Home Loans
- The loan can be a problem for undisciplined borrowers and eventually lead to a reduction in equity
- Interest rates are usually higher than the standard rates
- Lenders look at this loan as maxed out and it counts against you during attempts to borrow funds.
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