Home Equity

July 30, 2009

A home equity is a form of acquiring credit where your home will serve as collateral. A home is a client’s most valued asset, where most homeowners use home equity in order to acquire credit for home improvements, education and medical bills. Home equity should not be used for daily expenses. A home equity allows you to be in line for a certain amount of credit being approved. The home is appraised and a value is set, in case of any mortgages currently existing, this amount will be subtracted and a mortgage provided.



The lender or financial unit will consider a borrower’s repayment ability by taking a look at debt, income and any other financial obligations. A borrower’s credit history will also be looked at. Most home equity plans have a fixed time period where a borrower can borrow money up to ten years. at the completion of this period, a borrower will be allowed to borrow more money depending on the plan that you have signed. In case your plan does not include a renewed credit line, additional money will not be able to be borrowed. Once a home equity has been established, you can borrow right up to the line of credit allowed. Borrowers can use credit cards and check books to draw on the line. Some plans may have a clause on limitations of how to borrow the money. You may be allowed to borrow a minimum amount or else have an outstanding minimum amount. Some plans may allow you to take an advance upfront.

When looking for a home equity plan, look at a plan that meets your requirements best. The agreement must be read with care and caution and the conditions and terms stated must be best suited to you. Costs will need to be compared since the credit line in the home equity plan will not include fees and closing costs, it will only reflect the interest rate.

Home equity will provide a variable rather than a fixed interest rate. This variable depends on an index which is available publicly. The interest rate will change accordingly as per the changes in the index value. A borrower must be aware of which index is used and how often changes will occur in the index and how high it has risen in the past. Lenders allow for an interest rate which is discounted usually for six months. A home equity plan must have a cap on how high the interest rate can increase. Certain plans state how much of an increase your payments may become or in case of a drop in the index, how low the interest rate can fall. Some financial units allow for a borrower to convert from variable to fixed during the home equity plan.

Mentioned below are some costs associated with setting up a line of credit which is quite similar when purchasing a home.

  • A property appraisal fee to place an estimate on your home
  • A non refundable application fee
  • Up front charges
  • Attorney fees, mortgage preparation fees, insurance, taxes and closing costs



Additionally a borrower may have to pay annual fees, maintenance fees and bear memberships costs during the time of the plan.

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Written by Uncle Sam · Filed Under Mortgage and Loan 

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