Article by Aaron Levi, FreeMortgageIndex.com
Finance, being an integral part of our life, often makes us confront certain terminologies that leave us spellbound, to say the least. One such term is the equity line of credit of ELOC; it’s defined as a combined form of a line of credit and an equity loan. To elaborate further, a line of credit is the maximum credit that a customer is allowed and equity is the difference between the market value of a property and the claims held against it. Or in other words, it’s the difference between total assets and total liabilities. Equity line of Credit thus establishes a loan that grants the maximum amount depending on credit and equity.
The specialty of equity line of credit lines in its stretch ability; the process allows the flexibility of borrowing without the borrower applying every time when money is needed. A simpler explanation would be to describe it as borrowing in installments; the only care that must be taken is to keep check on the borrowed amount, it shouldn’t exceed the borrower’s credit limit. Being an on-going form of loan, Equity Line of Credit is a big help towards short-term expenses; it functions the same way as a credit card. Upon payback, the full amount of the credit line is restored.
Equity line of Credit involves lump sum amounts, which is paid back over a period of time. Interest applies, the rates for which varies from creditor to creditor. However, the rates usually stay lower than other forms of consumer loans and remains tied to prime rate, making equity line of credit a smarter way to borrow than any other form of loans.
Unless there is a mortgage on a property, an Equity Line of Credit loan is the choice per se for any person. If all the factors fall into the right place, an equity line of credit can be stretched over 30-years to convert the equity on a mortgage-free property to cash. However, minor terms and conditions for Equity Line of Credit may vary from state to state, though the set rule of first 10 years interest only stays constant.
Equity Line of Credit has certain counterparts that appear under different names: Business Lines of Credit and Home Equity Line of Credit (HELOC). While the first one is strictly meant for individuals commencing small businesses, the second type is meant for anyone looking forward to a large amount. As for the business lines of credit, they serve the purposes of a collateral, instead of putting one’s home or personal assets as security. It’s tough obtaining one, but they provide more capital. However, like any other forms of loan, they also have maximum borrowing limits, which depends upon the amount of collateral available and related circumstances. The interest rates depend on the prime-lending rate; it increases with the relative risk of the business type.
As for Home Equity Line of Credit or HELOC, a variety of interest rates and payment plans are available, ranging from large payment upfront to large balloon payment at the end of the term. Though some of them come without the aforementioned, but they often have higher monthly payments. Fine prints are aplenty, hence its recommended to stay careful before deciding on one; more so, because it involves the home of the applicant.
Home equity line of credit grants up to 75% or more of the value of a property but deducts the balance mortgage amount, if any. Some of the HELOC-s is also subjected to annual membership/participation fees apart from transaction fees; therefore, a thorough market research is required before setting for one.
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