A home equity loan (or line of credit) is a
second mortgage on your home that lets you turn equity into cash, allowing you
to spend it on home improvements, debt consolidation, college education or other
expenses. YOU SHOULD USE EXTREME CAUTION IN OPENING A HELOC. YOU ARE PUTTING
YOUR HOME AT RISK SHOULD YOU FAIL TO PAY.
LTV Many banks will allow a borrower to have total mortgages
close to 80% of the value of your home. We strongly suggest that you never go
above 60% of loan to value (LTV).
House Value: $400,000. Maximum LTV (Loan to Value) = $320,000
More and more lenders are offering home equity lines of credit. By using the
equity in your home, you may qualify for a sizable amount of credit, available
for use when and how you please, at an interest rate that is relatively low.
Furthermore, under the tax law--depending on your specific situation--you may be
allowed to deduct the interest because the debt is secured by your home
Many home equity plans set a fixed period during which you can borrow money,
such as 10 years. At the end of this "draw period," you may be allowed
to renew the credit line. If your plan does not allow renewals, you will not be
able to borrow additional money once the period has ended. Some plans may call
for payment in full of any outstanding balance at the end of the period. Others
may allow repayment over a fixed period (the "repayment period"), for
example, 10 years.
Once approved for a home equity line of credit, you will most likely be able
to borrow up to your credit limit whenever you want. Typically, you will use
special checks to draw on your line. Under some plans, borrowers can use a
credit card or other means to draw on the line.
There may be limitations on how you use the line. Some plans may require you
to borrow a minimum amount each time you draw on the line (for example, $300)
and to keep a minimum amount outstanding. Some plans may also require that you
take an initial advance when the line is set up.
Do not close a Home Equity Loan or Line of Credit without consulting an independent
attorney or accountant.