Home Equity Line of Credit
Home equity lines are offered based on the what is commonly known as Combined Loan to Value (CLTV). Which is determined by combining the 1st mortgage loan and the desired credit line and dividing the total by the value of the property.
The higher the ratio the higher the rate. As the the higher ratio is normally associated with higher risk level. Factors that will determine what ratio will be acceptable to a lender include but are not limited to; credit rating, documentation level, debt ratio, and loan amount.
The Home equity line of credit calculator will determine possible available credit lines based on lender's guidelines. Though the calculator allows for calculating available credit even is you have an existing seconded loan in most cases in today's economy chances are that the line of credit is only going to be available if it is used to pay off the existing second.
Use the home equity line of credit with caution and pay special attention to the lender's guidelines.
Unlike a purchase or refinance mortgage which is granted for a fixed amount, an equity line of credit may be adjusted during the life of the loan at the lender's will. In most cases the small print of the equity line documentation will include a clause that that gives the grantor the right to alter the credit limit at will and lenders will exercise that right if the real estate market takes a turn for the worse.
The above is only true for the unused portion of the equity line of credit so long as the borrower has kept up with the payments of the used portion.
The debt ratio calculation for an equity line of credit is different (a little higher in most cases) than a purchase money or refinance mortgage loan, but the fact that there is room in the Combined Loan to Ration does not automatically qualify one for a credit line.
Other factors to consider are; Equity lines are normally priced with little or no closing costs but at a higher rate than the normal prevailing rates for first mortgages or Trust deeds. Furthermore unlike first mortgages equity lines are not available for 30 year periods but are rather based on 10 or 15 year periods, though they are available with interest only payments.
The fact that equity lines of credit could be based on interest only payments is very important because it is simply easy to forget that very essential reality and suddenly wake up to the fact that a huge balance is outstanding which in slow markets may be impossible to refinance.
In brief; exercise a lot of caution when using an equity line of credit.