How does an equity line of credit work?
When you apply for an equity line of credit, the lender will have your home appraised to see how much it is worth. If you currently have a mortgage loan against your home, the lender will subtract the outstanding loan balance from your home's appraised value. The resulting value is the amount of equity you have in your home (home equity). The lender uses the value of your home equity to determine how much you can borrow for an equity line of credit.
The lender will give you a checkbook or a debit card. When you use them you are accessing your equity line of credit. Once you access your equity line of credit, that money will be subject to interest charges and you will have to make monthly payments to pay off the borrowed money. Once you have paid off the money that you borrowed, you can access that money again if you need to. For example, lets say you have an $10,000 equity line of credit, and you use $1,000 to pay for some holiday shopping. Your available equity line of credit would then be $9,000. When you pay back $100, your available line of credit would then be $9,100.
How much does it cost to obtain an equity line of credit?
Depending on competitive market conditions, you may or may not have to pay an application fee and some closing costs. You only pay interest charges on the amount of the equity line of credit that you are actually using at any particular time.
What is the interest rate on an equity line of credit?
A lender typically bases the rate on their equity lines of credit on their Prime Interest Rate (the interest rate they charge their most credit-worthy borrowers). The lender will then either add or subtract a percentage (typically 1-2%) from their Prime Rate to determine the interest rate you would be charged on your equity line of credit. This percentage will depend on your credit and the amount of money you wish to borrow. This interest rate can be subject to change based on prevailing interest rate levels. Some lenders have fixed rate options for borrowers who prefer more repayment stability when making large advances against their equity line of credit.