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What is a home equity line of credit?

A Home equity line of credit is a revolving line of credit secured by a real-estate asset. A Line of Credit can represent your whole home loan if at the time of application your property is unencumbered, or it may form a part of your overall mortgage. The interest rate on a Home Equity Loan and payments on such a facility must remain variable because the borrower is allowed to draw moneys out and pay moneys into the line of credit as often as they wish.

A line of credit is like a credit card secured by your home or investment property. Most people use their credit lines only for major expenses such to finance home improvements, or pay off major debts. With a home equity line, you will be given access to a set amount of credit, but you only pay interest on the amount you access.

How Do I know How Much Equity I have in my Home?

This really quite simple. Your available equity is the difference between your current home value and your outstanding mortgage. If you have had your current home loan for a number of years without revaluing your property, you may find that you have a lot more free equity than you think.
Some lenders in Australia are offering home loans at 100% and even 106% of the value of your home. These loans are offered on home purchases. For a mortgage refinance, most lenders will be happy to lend you up to 95% of the value of your home. To qualify for such a high LVR (Loan to Value Ratio) you must have a clean credit history and have adequate financials to support your loan application. You will still be able to obtain a Line of Credit against your home even if your financials are not up-to-date or if you have had some defaults in your history - however the LVR available to you will be slightly lower (perhaps 80% - 90%) and the interest rate charged on the loan may be slightly higher.

Lets assume that your home is worth $400,000 and your outstanding mortgage is $200,000. If this is the case, your current mortgage is up to 50% LVR of your home value. You should be able to obtain a Line of Credit to the value of $ 120,000, taking the total loan to $320,000 - ie. to 80% of the value of your home.

Why Should I Consider A Line of Credit?

The main advantage of a Line of Credit is that you decide when and how much you spend. You are only charged a home loan interest rate on the money you draw out. You are free to repay the moneys drawn at any point in time.
While a Line of Credit can be used for anything from a car loan to an overseas holiday or home renovations, education expenses, further investment etc., one of the best uses for this facility is Debt Consolidation. By using some of your line of credit to repay all your other unsecured debts, you will see yourself paying around 7% interest on these debts instead of 15-20%. Therein lies a major saving allowing you to reduce your monthly obligations and pay off your mortgage faster.

What are the main advantages of a home equity line of credit?

The primary advantages from a home equity line of credit are lower monthly payments, because you only need to cover the interest expense on the money drawn out. The other benefit with an equity line of credit, is that the interest rate is lower in most cases than the credit card rate.
Your financial position may change between the time that you apply for your initial home loan and some years down the track. By incorporating a Line of Credit into your Mortgage you may find that this line of credit will help you to make your mortgage repayments if you:

-loose your job;

- suddenly get sick and are unable to work for some months;

- need to take maternity/paternity leave and your income drops;

- have any other unexpected changes in personal circumstances.

In effect your Line of Credit acts as your ‘emergency insurance’.

Are there any Disadvantages to a Home Equity Line of Credit?

There are no real disadvantages. However you do need to be disciplined to ensure that you do not go on a spending spree with your line of credit. As you are in effect using your home as security to pay your other debts, you must take extra care in ensuring that you do not ‘overspend’. The risk of spending beyond your means is that you may lose your home. However this risk like all financial risks can be managed and should not prevent responsible adults from taking control of their financial future.

What if I wish to make principal payments?

You may make additional principal payments on your line of credit whenever you wish.

Will I need to Pay Penalties for early repayment?

In general terms your line of credit can be drawn and repaid at will without any penalties. You will however need to consult your chosen lender to determine what fees and charges will apply with your loan.

For more information on a Line of Credit or Home Equity Loan please visit

www.webdeal.com.au or

www.honeyloans.com.au

Maya Pavlovski holds a Bachelor of Commerce Degree from the University of Melbourne and is a qualified CPA

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If you are planning to get a mortgage, then you should make sure that you avoid a number of common mistakes that will leave you paying too much money or getting into financial difficulties. If you are aware of potential mistakes you can make then you will be better equipped to get the best deal for your needs. Here are the most common mortgage mistakes and how to avoid them:

Not sorting out your finances

If you try and get a mortgage before you have sorted your finances out, you could find yourself getting a rough deal or even being rejected for a mortgage. If you are rejected for a mortgage it can harm your chances of getting one from elsewhere. Before looking at mortgages, get all of your finances in order and have all your paperwork ready to submit to mortgage lenders. Also, get hold of your credit report and make sure that all the information on it is correct. If there are mistakes on your credit report it could harm your chances of getting a good mortgage.

Looking for a house without pre-approval

Many people make the mistake of looking at property without having any idea whether they can secure a mortgage to pay for it. The most common mistake people mistake is confusing ‘pre-qualified’ with ‘pre-approved’. Pre-qualification is a very initial estimation of how much you can borrow, and there is no guarantees you will get this amount at the rate you want. Pre-approval means that you go through the credit checking process and the lender agrees in writing to give you a certain amount of money. Getting pre-approval gives you a budget and makes you much more attractive to sellers because you have the finance already in place.

Borrowing too much

Perhaps the biggest mistake people make is to borrow too much money. This can come about through a combination of not being honest with yourself and pressure from lenders. If you are not honest with yourself about how much you can afford then you will end up in financial difficulty. You shouldn’t be tempted by lenders who offer you overly generous mortgages because it is you who will pay the price if you cannot keep up with the repayments. Work out how much you can comfortably afford to pay each month and stick to this budget.

Not shopping around

It is quite easy to get hold of a mortgage, but if you want a good deal you have to shop around. If you find a good deal, you shouldn’t automatically think it is the best deal you can get. Many companies offer amazing deals that turn out to be a lot more expensive than initially advertised. Do your research and find out what someone with your credit rating should be paying on average for a mortgage. If you do this then you will end up with a much better price.

Paying for things you don’t need

With a lot of mortgages you will be offered extra items and pay extra fees that are simply unnecessary. Although they might seem a small amount here and there, they can soon add up and you could end up paying a lot more than you need to. Make sure that your mortgage agreement only includes the items that you need, and query the price of any fees you think are too expensive. If a company tries to charge you too much then walk away. Remember, there are always other providers for you. If you are careful and avoid common mortgage mistakes then you will get a great deal and remain financially stable.

For additional articles and an extensive resource for everything about credit cards and finance, please visit us at Credit Cards and Mortgages
Visit http://www.creditcards-gb.co.uk

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If you need money for home improvements or a business, then you could use your mortgage to generate the credit you need. Although using your mortgage to generate credit shouldn’t be your first choice, if other lines of credit are closed to you then releasing equity from your home is a good way to generate a line of credit.

When should you release equity?

Releasing equity should definitely not be your first choice for generating credit. If you need money over a short period, then try using credit cards or save up the money. You could also get a personal loan. However, if you have a lot of equity paid for in your property and you need a large sum of money, then equity release could be helpful. Also, if other lines of funding are not open to you because of poor credit or other reasons, then equity release might be for you.

Remortgaging

One way to release equity in your property is to remortgage. You simply have to get a new mortgage, borrowing more than you currently owe on your property. This way you can make use of some of the capital you have already paid back into your home to consolidate debt or make home improvements.

Mortgage for life

Another way to release equity using your mortgage is to change your mortgage to a lifetime mortgage. This means that you take out a mortgage that will allow you to get a lump sum that you can spend as you choose. The interest rates on the loan will be high, and will be allowed to accumulate for your lifetime. When you die, the loan is repaid through the sale of the house. If the value of the loan and interest is more than the house is worth, the lender absorbs the loss. If the loan amount is less then the extra money is distributed to heirs according to your will.

Home reversion

Home reversion is another method of equity release. Home reversion means that you sell a proportion of your house to a company, who will give you a lump sum in return. When the house is eventually sold after death then the company receives the proportion of the house that they paid for, whether that is more or less than the loan that was given out.

Problems with equity release

Although equity release can free up much needed funds, there are a number of flaws with the concept. The major problem is the risk involved. You might be giving up a lot of home equity that has taken you years to build up for a relatively small loan amount. Equity release should be looked at as a last resort, but if you know what you are getting into then using your mortgage to generate credit can help you pay for items that you need or to consolidate high interest debts.

For additional articles and an extensive resource for everything about credit cards and finance, please visit us at Credit Cards and Mortgages
Visit http://www.creditcards-gb.co.uk

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