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How
Does an Equity Credit Line
Work?
A
home equity credit line is a
re-usable credit account
which is secured by the
equity in your home. It has
an adjustable interest rate,
usually based on the prime
rate as published by the
federal reserve or in the
Wall Street Journal.
Depending on your credit,
lenders may offer a credit
line based on prime rate
plus a margin, such as, a
quarter of a point, or prime
plus no margin.
There
is a draw period of usually
10 to 15 years where you can
withdraw the funds as you
desire. During the draw
period, you have the option
of making interest only
payments, or fully amortized
payments each month. At the
end of the draw period, the
home equity credit line will
convert to a fully amortized
loan for the remainder of
the balance.
A
home equity credit line is
different from an equity
loan because you are able to
draw money out of the
account as you need it,
instead of receiving the
full balance of the loan at
closing. Another difference
is the adjustable interest
rate, which can adjust every
month depending on the
economy. Also, closing costs
are usually less for a
credit line when compared to
a fixed installment
loan.
Because
a home equity credit line is
secured by your primary
home, the interest portion
of your payments can be tax
deductible. Also, some
lenders will lend as much as
100% loan to value.
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