Home Loan-based Line of Credit



Home Equity Loan Line of Credit

A home equity line of credit is a revolving credit line that uses an individual's home as collateral. The individual is given a credit limit based on a percentage of the appraised value of the house minus the remaining balance of the mortgage. It would work something like this:

Appraised value of home $100,000
Percentage x 75% (example purposes only)
Percentage of appraised value = $ 75,000
Subtract balance owed on mortgage - $ 40,000


Potential credit $ 35,000

There are other factors that determine the credit limit that is granted to an individual. These factors include:

  • Ability to repay the loan
  • Debt to income ratio
  • Credit history

If any of these factors are not satisfactory, one can be denied a home equity credit line.

The term of a credit line is determined by the lender and can be fixed. An individual might have a certain amount of years in which they can access funds in the credit line. These terms differ and are subject to different restrictions.

A term can be renewable or not. A lender may require full payment of outstanding balances before the term can be renewed. A repayment term is an alternate method to the full payment of the outstanding balance. A repayment term is issued for a fixed number of years. Access to a home equity credit line come in different forms.

Some lenders will issue special checks for an individual to use. While others issue credit cards or debit cards to draw from the account. Whatever the method, one should be aware of the limitations on the account. Some accounts have withdrawal limits that will prevent withdrawing more than a certain amount in a given time period and others may have early re-payment penalties.

If some of these stipulations are violated, there is a possibility that the account could be frozen until the lender is able to verify the transactions. A minimum account balance can be required to avoid additional service charges. This being said, be fully aware of the requlations on your account before you start spending.


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