The home equity line of credit is a loan that allows homeowners to borrow against the equity in their home. There are various types of home equity lines of credit. These variations are frequently determined by the interest rate charged to the homeowner.
Variable interest rates are sometimes associated with a home equity line of credit. With variable interest rates, the homeowner has no way of knowing what the interest payment will be from month to month. The loan's interest rate will fluctuate to the same extent as the Federal Reserve Board's interest rate.
In some cases, a low introductory interest rate is offered on a home equity line of credit. These rates appear to be appealing, but they conceal the fact that the homeowner will later be asked to pay a significantly higher rate. The homeowner must carefully read the loan materials in order to learn exactly what the payments may be at a later date.
Other distinctions in home equity lines of credit frequently concern the costs of the application process. Some home equity line of credit offers include a large one-time fee. Other offers for a home equity line of credit may avoid mentioning such a fee, but then include ongoing fees. A balloon payment could also be added to a home equity line of credit. This is a sizable payment that is required of the homeowner once the credit offer period has expired. Alternative offers for a home equity line of credit could avoid a large balloon payment in favor of much higher monthly payments.
If the differences between the various types of home equity lines of credit perplex the homeowner, it may be a good idea to consider alternatives to the home equity line of credit. If a homeowner does not want to obtain a home equity line of credit, he or she can obtain a second mortgage or borrow from credit lines that do not use the home as collateral.
To borrow from credit lines that do not require the homeowner's home as collateral, the homeowner must seek out those who value what he has to offer. Perhaps he owns land in a distant region where the value of land is increasing. This could be used as collateral for another type of line of credit. If a small business owner does not want to put his home at risk for a home equity line of credit, he may need to consider using the business as collateral.