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Credit Line Calculator - How to Use a Home Equity Credit Line Calculator - How Much Money Do I Qualify For?

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You can find plenty of simple credit line calculators online, such as this one at Lending Tree.com But what does it all mean? How much money can you get out of your home? And should you even be considering a line of credit, or should you be looking at a second mortgage loan instead? This guide will help to clear up these questions, so you can move forward with confidence.

How Much Money Do I Qualify For?

Firstly, figure out how much money you still owe on your house’s mortgage. Subtract that amount from the current appraised value of the house. This is your home’s equity, and you can qualify for a certain percentage of this amount. The percentage differs with each company, but is usually somewhere around 75%.

Of course, the real question here should be ‘how much do you need?’ Rather than borrow up to your max credit amount, it is better to work well within your budget to avoid future pitfalls when it comes time to pay the loan back.

How Do Home Equity Credit Lines Work?

Home Equity Credit Lines use your house as collateral. Many plans require no actual principal payments throughout the loan’s term – only a set interest amount. So for example, if you borrow $10,000 from your credit line and only make the minimum (interest-only) payments on it every month, when the loan term ends the entire $10,000 sum will be due.

This is why it is such a necessity to have a firm plan in place for how you will repay the money. If the term comes due and you are unable to pay the principal, you run the risk of losing your house entirely, which you guaranteed as collateral for the loan. Some people use these funds for house renovations which they reasonably expect will increase the value of the home by an amount beyond the total borrowed. Some use it to invest. And some (unwisely) use it to purchase goods which do not appreciate in value or add value to the home. The point is, whatever you plan to use the credit line for, make sure you have a foolproof plan for paying it back. If you do not, you could soon be starting from scratch all over again!

Also keep in mind that it costs money to open the line of credit. You need to pay for appraisal fees, legal fees, etc. much like you did when you originally purchased your house.

Home Equity Credit Lines vs. Second Mortgages

Second mortgages are a more traditional method of utilizing home equity for extra funds. Here is a list of the main differences between the two:

APR Calculation
The APR for a second mortgage takes into account finance charges, appraisal fees, etc. in its calculation. However, the home credit line is based solely on the periodic interest rate.

Amortized Payment Schedule
One big difference with home equity credit lines is that they do not have a schedule of set payments throughout the life of the loan, only a minimum, usually interest-only payment. With a second mortgage, you pay down principal and interest with each monthly payment much like a normal mortgage. With a line of credit, this is usually not the case.

Continuing Credit Line vs. Lump Sum
The line of credit is, as the name implies, a continued line of credit that is extended to you over a set period of time. The second mortgage, on the other hand, is a loan for a set amount that is then paid down over a pre-agreed amount of time. If you have a set purpose in mind for a one-time major expense like adding an addition to your home, a second mortgage would probably satisfy your needs better than a line of credit on your home.

That is it for this introduction to home equity lines of credit and their major alternative, second mortgages. Now when you use a credit line calculator online, you will be able to tell what is really in store for you!

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