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Tapping your equity with a Home Equity Line of Credit

Posted on: 18th May, 2006 09:49 pm
If you're thinking about ways to tap your financial resources, you'll find that utilizing your home equity is often a viable option. Your home equity is the current value of your home minus the money you owe on the mortgage. A simple way to get the most out of your equity if you're in a financial crunch is to take out home equity line of credit, which is a kind of second mortgage.

A Home equity line of credit (HELOC) gives you the opportunity to fulfill your financial needs using your home equity as security for a loan. For buyers that don't have any money for down payment, a home equity line of credit is a good option. With a line of credit, you never borrow beyond a certain credit limit, which helps you to manage your debts better.

How a HELOC works

A home equity line of credit works like a credit card where you can withdraw cash up to a predetermined limit any time within the draw period. It's easy to access the funds in a HELOC by writing a check, using a credit card, or by using a debit card that accesses the line of credit.

When you take advantage of a HELOC, you are required to make a minimum monthly payment that covers the interest. But you can also pay down the principal so that your debts are cleared and you can withdraw funds again if the draw period isn't over.

Once the draw period ends, you can ask for a renewal or you can no longer access the cash once the draw period expires. The repayment period starts once the draw period has expired and the HELOC takes the form of an adjustable rate mortgage (ARM) that requires you to pay down the loan in regular installments.

In most cases, you have a draw period of 5 to 10 years, after which the repayment period is typically 10 to 15 years. There are lenders who offer HELOCs with no fixed terms for withdrawal and repayment of loan; you can carry on with the loan until you sell the property.

Here's an example on how a HELOC works:
Suppose you have a line of credit of $10,000.
You borrow $6,000 in order to pay for a kitchen remodel.
You owe the $6,000 you've already taken and the remaining credit available is $4,000.
If you pay back $2,000, you still owe $4,000.

So, you have $6,000 ($4,000 + $2,000 = $6,000) in available credit.

Related Article:

Hi Archie,

Welcome to the forum.

I don't think that a opening a high limit HELOC affect your score. Instead if you can make the payments on time regularly then it can help you to increase your credit score.

Feel free to ask if you have any further questions.

Best of luck,
Posted on: 18th Apr, 2008 12:29 am
Heloc being a revolving debt, when the credit bureaus calculate your credit score, they'll consider the ratio between your outstanding debt and available credit, not how much of credit is available to you.

If you can maintain a debt to available credit ratio of 25% or even lower, your score would remain unaffected. Beyond this ratio, there may be a negative influence on your score.

Hope this helps...

God bless you.

Posted on: 19th Apr, 2008 04:31 am
I hate my current job but feel stuck because of my mortgage.MY husband and I have started the ground floor work of 3 apartments at the back of our home, but we need about $50,000 to complete the work. Sould we mortgage our home?. I just do not know what to do. We are thinking about finishing the apartments and selling the entire building, which when completed should sell for about $300,000,but we are afraid if it will be sold, how quickly and if it will be sold at our price. If sold we can pay of our first mortgage and pay of the loan. What should we do?
Posted on: 02nd Jan, 2009 12:05 pm
Hi tameca,

A query similar to yours has been answered in the given link:

Please take a look at it. I hope it will help you.

Posted on: 02nd Jan, 2009 09:57 pm
Does any one know how this scenario works?
2nd lender changes the secure heloc to unsecure revolving credit card and keep it on your credit at the time of short sell? Then the borrower has to carry it like a credit card and keep making the monthly payments.
What would be the effect on credit score and obtaining future loans?

Posted on: 01st Feb, 2009 11:08 am
hi r,

there's nothing to worry about it. basically, the mortgage balance couldn't be recovered through the sale. this is why the lender wants you to pay the rest in the form of an unsecured loan. the loan becomes unsecured because the collateral has been lost due to short sale.

the short sale will reduce your credit score by 80-100 points. but the second mortgage changing to an unsecured heloc won't affect your credit in any way. however, you need to keep making on-time payments in order to pay off the unsecured loan.

good luck
Posted on: 06th Feb, 2009 05:03 am
I live in California with my wife. In 2005 she became ill and could not work, so by the summer of 2007 we defaulted on our house. The bank agreed on short sale and the house was sold January 2008. When we bought the property the bank set up the finance with two loans, the mortgage loan (80%) and a line of credit (10%). The last 10% we put down. The property was sold for $215 000 less that we paid for it. We received a 1099-C this year for the mortgage loan but nothing for line of credit.
My question is now: There is a company that bought the HELOC debt from the bank who is calling me and they want me to pay the loan back. We dont have the finance now ($65 000), and I dont know if we ever will. So what can I do?
Posted on: 16th Jun, 2009 06:16 pm
I would be careful about paying anything to a third party company. Could be a potential scam
Posted on: 16th Jun, 2009 06:31 pm
can the outstanding balance of a heloc be included in a refinance of a 1st and 2nd mortgage to a single loan? is this scenario even allowed? :?
Posted on: 20th Nov, 2009 01:09 am
hi guest,

you can refinance both the first mortgage and the home equity loan into a single loan. but there has to be enough equity for you to be able to do so. in fact if there's enough equity in the property and you can refinance both the loans together at a lower interest rate, you can save a lot of money in interest.
Posted on: 21st Nov, 2009 05:32 am
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