Line of Credit
Line of Credit Can Help Pay for Big Ticket Items
There are lots of reasons why people open a line of credit with their bank or another financial institution. One of the most common lines of credit is overdraft protection. Most banks offer this to checking account customers. A credit line that offers this type of protection gives you a set amount of money that you may borrow each month in order to avoid overdrafts. While there is an interest charge on the money that is borrowed, it usually is far less than would be paid if you bounced a check. This type of loan helps many people who live paycheck to paycheck and sometimes find themselves short when unexpected expenses crop up.
Another type of credit line is a loan based on the equity homeowners have built in their homes. Some of the most common are debt consolidation. You may be tired of paying double-digit interest rates on your bank credit card balances. By opening a credit loan, you give yourself the flexibility of being able to consolidate your bills into one monthly payment, with a much lower interest rate.
Because your home is the collateral on a home equity credit line, many people use this loan to pay large expenses such as college tuition, medical expenses, or home improvements. With this type of loan, the amount that is offered for use is based upon the value of the home you are placing as collateral. The formula for how much money you will be able to borrow is typically a percentage of the balance that is owed on the home’s mortgage subtracted from the home’s appraised value.
In addition, the person’s ability to repay the money borrowed is also considered. A home equity credit line will typically be available for a set period of time, often 10 years. Usually borrowers are only required to pay the accrued interest on the money that has been borrowed while the loan is still active.
Once that time period expires, no more money can be borrowed. Depending on the wording of your line of credit, you will either have to repay the loan completely at that time or you will begin making payments over a set period of time.
Typically a line of credit will offer a variable interest rate that is based on the prime rate plus a certain number of percentage points. Some loans have predetermined caps that the interest rate cannot exceed or fall below. On a predetermined anniversary date, the loan’s interest rate will be reset each year.
In order to open a line of credit, borrowers fill out an application and pay to have an appraisal of their property performed. Other charges include a certain number of percentage points that are paid to secure the loan and closing costs that are paid when the loan is issued. Some institutions also charge an annual maintenance fee during the life of the loan. It is important to know the charges you will accrue before you apply for a line of credit.