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Home Equity Credit Line Facts

The more informed you are as a borrower, the better-equipped you will be to select the right home equity credit line. Here are some things you need to know to make your decision.

Credit Limit

With a home equity credit line, you will be approved for a certain amount of credit, or a credit limit. Your credit limit represents the maximum amount you can borrow at any one time. Many lenders determine the limit of your home equity credit line by taking a percentage (75%, for example) of your home's appraised value and subtracting the outstanding balance of your mortgage. Here is an example of how a home equity credit line might work:

Appraised value of home $100,000
Percentage X 75%
Percentage of appraised value =$75,000
Less balance owed on mortgage -$40,000
Potential credit $35,000

Costs of a Home Equity Credit Line

In addition to the interest rate on your home equity credit line, you will also have to pay certain expenses to establish and maintain the loan. Here is a list of expenses commonly associated with a home equity credit line:

  • Property appraisal fee to determine value of your home
  • Application fee (might not be refundable if you are turned down)
  • Up-front costs (such as points)
  • Closing costs, such as fees for a title search, attorneys, taxes, property and title insurance, and mortgage preparation and filing
  • Possible transaction fees for every time you access the line of credit

Lender Disclosure

Before you talk to a lender about a home equity credit line, you should know what they must disclose to you by law. According to the federal Truth in Lending Act, your lender must disclose information about the APR, miscellaneous charges, variable-rate features, and payments terms of your home equity credit line. In fact, you cannot be assessed any fees until the lender has disclosed this information. Generally, you will receive these disclosures about your home equity credit line when you receive an application form. Be sure to look at the frequently asked questions that have been answered to help you better understand the home equity credit line concept.