Mortgage / Equity

Home Equity
Line of Credit Mortgages

Many people confuse equity lines of credit in homes and real estate with mortgages. This mistake is easy to make because mortgages and equity lines of credit are both debts secured by real estate.

A mortgage is a onetime loan of money secured by a piece of property. An equity line of credit is an amount of credit secured by equity in a home or property that is available for the owner to use at any time. The difference is that the amount of the mortgage is set while the amount of the equity line of credit is determined by how much credit the owner uses.

It is also possible to get a mortgage that includes an equity line of credit. Such hybrid products are often available to people with a lot of income or very good credit.

Equity and Mortgages

Equity is the difference between the value of a property and the amount the property is mortgaged for. For example if a house is worth $200,000 and mortgaged for $110,000, the owner has $90,000 worth of equity.

An equity line of credit is an agreement by which a lender lets an owner borrow against unused equity in their property. To get an equity line of credit a borrower will have to have equity. When an equity line of credit is used, the equity is tied up until the owner pays off the credit.

As with a mortgage, the borrower will have to pay interest on an equity line of credit. A property owner that doesn’t pay their equity line of credit off will face foreclosure.

Line of Credit Mortgage Hybrids

There are hybrid financial products that do combine a line of credit and a mortgage. In these products the lender usually offers the property owner a mortgage and a line of credit in one package.

The advantage to these products is that the borrower only has to make one payment to pay both the line of credit and the mortgage. Another advantage is that the owner will only have to deal with one borrower.

A really big advantage to line of credit mortgages is that the lender may increase the line of credit as the owner pays off the mortgage. The lender does this because the amount of equity increases as the mortgage is paid off. This increases the owner’s ability to borrow against their property.

A line of credit mortgage will usually have the same interest rate for both the line of credit and the mortgage. This can help a property owner avoid using other forms of high interest lending such as credit cards

Line of Credit Mortgage Advantages

A big advantage to a mortgage with a line of credit is that it gives a property owner a source of credit to finance property related expenses such as repairs, remodeling, expansion and construction. Persons who buy older houses or buildings that might be in need of repair and those planning to construct a house or building would be well advised to get such a mortgage.

Getting a line of credit mortgage also ensures that a line of credit is available in the future. This can spare a property the expense of seeking future credit. It can also ensure that credit is available even if a property owner’s credit rating or income fall and make it more difficult to get credit in the future.