Mortgage / Equity

Home Equity
Equity Line of Credit

The way an equity line of credit works is actually quite simple. A person or business is allowed to borrow against the value of a home or piece of real estate or other property.

A property’s equity is determined by the difference between mortgage principal and equity. Equity is determined by subtracting the mortgage principal from the value of the property. If a property is valued at $300,000 and mortgaged for $100,000 the owner of that property has $200,000 in equity they can borrow against.

The amount of your equity line of credit is the amount of equity you have in the property used as collateral. The more equity you have the higher the line of credit will be. The less equity you have the less credit you can get.

How a Line of Credit Works

A line of credit is an agreement between a lender and a borrower. Under the terms of the agreement the lender makes a certain amount of credit available to the borrower. The borrower can use as much of the credit as he or she wants.

The advantage to a line of credit is that a borrower only takes out the amount they want. This means they can limit the amount of debt they have and the interest they will pay.

A big advantage to a line of credit is that is available immediately but doesn’t have to be used. The borrower can leave it sitting there or tap into it in an emergency situation.

Many businesses and homeowners use equity lines of credit as emergency financing. Others use equity financing to pay for expansion, repairs and new equipment. Homeowners can use equity lines of credit to pay for remodeling or repairs.

Examples of Equity Lines of Credit

The most common equity lines of credit are real estate and home equity lines of credit. These loans are based on the excess value of property borrowers have. A big advantage to these loans is that a borrower can get them regardless of income.

There are also firms called private equity lenders that make equity loans based on the excess value of other property. These lenders primarily loan to businesses and make most of their loans online. Many businesses will make private equity loans against equipment or inventory.

Pawn brokers and other lenders make equity loans on possessions such as cars, jewelry, electronics and firearms to private individuals. These are equity loans because the amount of the loan is lower than the value of the item. The pawn broker holds the item and if the borrower can’t pay it back they sell the item for a profit. The profit is based on the equity or excess value of the item.

Finding an Equity Line of Credit

The best place to find an equity line of credit is online. There are large numbers of home equity lenders and private equity lenders that advertise online. These lenders will make lines of credit available to almost anyone.

Mortgage companies and banks will also make home equity lines of credit available to homeowners and property owners. Pawn shops will make equity loans on possessions such as cars and boats.

Be Careful with Equity Lines of Credit

Borrowers should always try to limit the use of equity lines of credit as much as possible. Even though such lines of credit are easy to use and get they can put your possessions at risk.

You should always remember that you could lose your possessions, home or real estate if you are unable to repay an equity line of credit.