A home equity line of credit is an operating line secured by the equity in your house.
Home equity lines or Heloc’s are provided through banks and institutional lenders. Private mortgage lenders do not provide this type of mortgage lending product due largely to the fact that they are not set up to administer variable rate mortgage facilities.
This is a great residential home mortgage product that is very popular in the market place for providing ready to use cash on demand at low interest rates and flexible repayment terms.
A home equity line of credit will have very similar requirements to a conventional term mortgage whereby credit, income, and security will all be evaluated by the mortgage lender.
Because these secured lines of credit are only provided through institutional lenders, you are going to have solid credit and the mortgage amount cannot be more than 75% loan to value with some programs capping out at lower amounts.
Home equity lines are only available with variable interest rates which will typically range from prime minus 1/2% to prime plus 2%.
When a lender considers your ability to debt service a secured line of credit, they calculate whether or not your income is capable of servicing 100% utilization of the line at a 5 year fixed term rate to allow for any swings interest rate than can occur in the short term.
The only main qualifying requirement with respect to borrowing amount is that the approved line limit cannot exceed 80% of the property value.
Beyond that, there is nothing stopping a lender from providing up to 75% loan to value on any size property whether it be worth $200,000, $1,000,000 or some other amount.
That being said, most lenders have a sliding scale of how much they will individually lend on property values with the limit decreasing as the value of the property increases.
Up until April of 2011, a home equity line of credit was still classified as a lending product for insured mortgages.
During April, 2011, the banking regulations changed so that home equity lines of credit would no longer qualify for mortgage insurance, capping the maximum lending amount at 80% loan to value.
The banking regulations have further changed to reduce the maximum HELOC amount to 65% of the home value.
And outstanding balances will now need to be amortized out at some point versus just letting outstanding balances ride for long period of time and servicing the interest costs alone.
A home equity line of credit can be secured in a first or second mortgage position, depending on any existing mortgage financing that may be in place.
It provides the lowest cost form of residential mortgage financing available with on demand access and open repayment.
This is an excellent source of money to have available to you for unplanned situations or planned capital requirements that will only be outstanding for a short period of time.
That being said, there is nothing wrong with carrying a large balance on your line of credit for a longer time period. As long as you are meeting the financial requirements of the lender, your home equity line of credit should remain fully available to you.
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