Home equity lines of credit
Home equity lines of credit may be a new concept to some home buyers in the UK. Lines of credit however are a proven borrowing mechanism used by many businesses to help improve their cash flow and to help them invest in equipment or materials. Normally, a business will arrange lines of credit agreements with lenders based on the strength of their capital assets and also on the strength of their turnover. Providing that the business has a good credit record then lenders are generally willing to earmark lines of credit loans from which the business can dip into as and when needed.
How do lines of credit work?
Normally, lines of credit work like a credit card. Once lines of credit agreements are in place, borrowers will be able to withdraw funds from their lines of credit whenever they need to. The lender will issue a chequebook, company payment card or credit card to the borrower, enabling them to make withdrawals, which can either be to another bank account or directly to another creditor. Interest is then charged on the amount borrowed at the time the withdrawal takes place, allowing businesses to accrue interest incrementally once purchases are made.
Personal lines of credit
For the home owner, personal lines of credit (home equity lines of credit) are becoming increasingly available from lenders. Eligibility for home equity lines of credit rests on the home owner's assets - normally equity in their home. Equity is the difference between the value of the borrower's home and the loans secured on the home, such as mortgages and any other credit agreements where the home has been used as security.
Depending upon the amount of equity there is in the property, the home owner's current income to debt ratio and the home owner's credit history, lenders will make a decision on whether to extend equity lines of credit. If they do decide to extend equity lines of credit to home owners it will be limited to around 75% of the available equity in the home. Interest rates will also be higher than on a standard first mortgage loan.
Just as with business lines of credit, lenders will issue borrowers with a chequebook and/or credit card, enabling them to withdraw funds at their convenience. Again, interest is accrued only when payments are issued from the home equity lines of credit, and the lender is likely to issue monthly statements showing how much has been withdrawn against the credit. Normally, borrowers of home equity lines of credit will need to begin repayment of withdrawals at a minimum repayment amount on a monthly basis - just like on a credit card, but at a cheaper rate!