Equity home: Limits of HELOC

Home equity line of credit is a convenient source of money for many. The closing costs are less and provide the borrower with lot of flexibilities. The icing on the top is the need to pay interest rates only for the initial five to fifteen years.

The interest rates are at an all time low and there are people flocking to refinance their home loans so that monthly payments can be reduced. A home equity line of credit can be initiated with the extra cash after refinancing. This step is usually on the belief that HELOC can be accessed at will. This thought is very misleading.

HELOCs and home equity loans have limits which are mandated by the lenders. Their arguments are based on the declining value homes making HELOCs not without risks. The limits directly depend on the equity in borrower’s home. For example, if the house is valued at two hundred thousand dollars and balance left in the first mortgage is eighty thousand dollars, then equity on house is $120,000. An HELOC of 90% is taken on the house. The maximum limit for this HELOC would be $108,000.  Credit limits of 80% and 90% are usually allowed.

HELOC is not our traditional loan. On approval it can be used and treated like a credit card. It can be borrowed at will and replenished the same way. Interest has to be paid on the amount of money that is borrowed. It can be borrowed in totality if need arises. But it is not mandatory.

Equity does not refer to the full value of the home. Equity would decrease with an increase in balance of mortgage and decline in home prices. There have been instances when the lender has limited the access to HELOC due to non payments, part payments and late payments. The lender has the power to do so.

Federal Deposit Insurance Corporation (FDIC) asserts that the lender has to demonstrate decline in the value of the home before resorting to such measures. The decline in equity of at lease 50% should be proved for significance.

Normally a computer program is used by lenders to review values of properties and these cannot be completely trusted. It is better to have an appraisal done by the certified local appraiser.  Financial planning should be done with complete knowledge about refinancing and line of credit packages. Information and help would be provided by mortgage brokers who can also help you select the right deal.

The best way to use your HELOC is by applying for the maximum amount. This amount can be used for emergencies. A mortgage tax might have to be paid for HELOCs in some states. The tax is dependent on the amount of the credit line. An unused credit line can be used to improve the borrower’s credit score.

Every dollar spent using the credit line has to be repaid with interest. Thus it is better to be thrifty and disciplined while spending your HELOC since every dollar counts.