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Home Equity Line of Credit: The Facts

A home equity line of credit is a great way to finance home improvements, pay off high-interest debt, finance a car, pay for college tuition or buy a second home.

What Is a Home Equity Line of Credit?

A Home Equity Line of Credit works essentially the same way as a credit card, except that you borrow money from the equity in your home, instead of from a credit card company. With exclusive options like Quicken Loans' Home Equity Line of Credit, you can make interest-only payments for the first ten years, greatly reducing your monthly payment.

How a Home Equity Line of Credit Works

  • Your interest rate and annual percentage rate (APR) are typically calculated based your credit score, and the combined loan-to-value ratio (CLTV)
  • Your CLTV is determined by totaling balances of any current loans and the amount of the loan you are requesting.  This number is then divided by the value of your home. Generally, the lower CLTV ratio you have, the lower your interest rate and APR will be.
  • The interest rate and APR are adjustable. A change in your APR will change your minimum monthly payment.
  • Your rate adjusts as the result of an index plus a margin. The index is the Prime Rate as published in the Wall Street Journal at the time of the adjustment period. The margin will be determined at the time of your application. The index can change, but the margin will not.

Applying for a Home Equity Line of Credit
Here is a list of things to keep in mind if applying for a Home Equity Line of Credit:

  1. The lender will ask for some basic information about you, your income, the property, and your Social Security number (to obtain a copy of your credit report). Lenders like Quicken Loans can approve you right over the phone and even schedule your closing online.
  2. The amount you're approved for is typically the maximum amount you're allowed to borrow based on the amount of equity you have in your home and your ability to repay the loan.
  3. Because there is generally less paperwork involved, closing on a home equity line of credit is much quicker than a standard mortgage.  You should be able to close your line of credit, and receive a check, in as little as 7-10 days.
  4. Closing fees are generally required. These fees can include things like city, county and state recording fees and taxes, and depending on the state you live in, you may also be charged attorney fees. These closing fees can either be deducted from your line of credit or you can bring a cashier's check to pay for them at closing.

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