Equity loans, lines of credit defined ...
There are two types of home equity debt: home equity loans and lines of credit, also known as an LOC.
Home equity loan is a like standard home loan. Depending on the lender the term of the loan can be from 1 year to 30 years. You can make repayments and pay the loan over the term until there is no debt and the loan is paid off.
A line of credit, or LOC, works more like a credit card because it has a revolving balance. A LOC allows you to borrow up to a certain amount for the life of the loan – the maximum term is usually 25 years. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again, like a credit card.
A LOC gives you more flexibility than a home equity loan. The interest only term is usually 25 years with no requirement to pay the principal until the end of the term. A home equity loan can also be interest only. The interest only period is generally up to 5 years and then the loan converts to Principal and Interest repayments.
Example:
Let's say you have a $30,000 line of credit. You borrow $25,000 for a new kitchen. At that point, you owe $25,000 and you have $5,000 remaining in your line of credit, meaning you could borrow another $5,000.
Instead of borrowing more from the line of credit, you pay back $5,000. At this point you owe $20,000 and have $10,000 in available credit.
|
Line of Credit |
$30,000 |
|
Amount Borrowed |
$25,000 |
|
Available Credit |
$5,000 |
|
Amount Paid Back |
$5,000 |
|
Available Credit |
$10,000 |
A line of credit has a variable interest rate that fluctuates over the life of the loan. Payments vary depending on the interest rate and the amount owed. Minimum monthly repayments cover only the interest, although you can elect to pay principal at any time.
With either a home equity loan or a line of credit, you have to pay off the balance when you sell the house.
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