What to Consider before Applying for Home Equity Lines of Credit

Home equity lines of credit can provide you with a way to access your home's equity. You can obtain this type of account from many different financial institutions. Before you apply for one, there are a few things that you will want to consider.

Variable Rate

One feature of many home equity lines of credit is the variable interest rate that comes with them. While many home equity loans have a fixed rate of interest, many lines of credit do not. The interest rate for the line of credit is tied to the prime interest rate. It can fluctuate quite a bit from month to month. Therefore, you never really know what to expect as far as how much your monthly payment will be. If the economy is down and you expect it to be for several years, it may be to your advantage to utilize a home equity line of credit. The prime rate tends to be kept down during these times and it may be one of the least expensive interest rates available to you at the time.

Draw Period

The draw period of the home equity line of credit is also something to consider. Depending on what you need the money for, you will want to consider how long of a draw period that you need. The draw period is the time frame that you can borrow money from the line of credit. Typically during the draw period, you do not have to make payments on the actual balance. However, you may be required to pay the interest on the loan every month.

Borrowing Requirements

When looking at different lines of credit, you will notice that they may have different rules on withdrawals. For example, many lines of credit will require you to take out a certain amount when you open the line. For example, you might have to initially take a disbursement of $2000 and then you still have the rest of your credit line available for the draw period. Depending on your purpose for getting the line of credit, this may not be to your advantage. Many people open lines of credit just so that they can have a readily available source of emergency funds. They do not necessarily want to borrow any money upfront. Therefore, a loan that requires you to take a large initial disbursement would not be to their advantage.

Line vs. Loan

When you are considering applying for a home equity line of credit, you may also want to consider using a home equity loan. They are both very similar products that carry with them some of the same advantages. However, they do differ in a few key areas. With a home equity loan, you borrow all of the money that you need at the beginning. Then you have a fixed payment over a number of years. With the line of credit, you borrow as you need it. With a home equity loan, the big advantage is that you can get a fixed rate of interest and payment. The interest rate will also often be lower than what you can get from a home equity line of credit.