12. Home equity credit lines
Home equity credit lines are taken for an indefinite period of time. They
usually come with the equivalent of a checkbook that the borrower may simply write checks
on to increase the loan up to the maximum permitted by the loan agreement. Lenders will
normally want to keep the maximum loans against a property well under the appraised value.
They will not want to allow a home equity credit line that brings the total loans on the
property above 85 or 90% of the propertys value.
The interest rate on home equity credit lines is often adjustable, tied to the
Prime Rate plus some margin, like 1 to 3 percentage points. The outstanding balance on a
home equity credit line is typically scheduled to be paid off in six years. Because of the
short payoff time, when compared to a second mortgage, monthly principle payments are
normally larger for home equity credit lines than for second mortgages.
Because a home equity credit line is secured by the property, the lenders
risk is not too great. Thats why the home equity credit lines are a popular
alternative to unsecured credit lines, such as credit cards, which may have rates double
that of the home equity credit line.