Home equity loans can be a good source of credit if you need money for home improvement remodeling, bills, college tuition, to make a purchase, or almost any reason at all. Home equity loans are based upon the amount of equity you have in your home.  Equity is the difference between the fair market value of your home and what you owe on your home.  For example, let’s say that the fair market value of your home is $175,000 and you still owe $75,000 on your home.  In this case, you have $100,000 of equity in your home.

Home equity loans are usually done as a HELOC or home equity line of credit, these types of home equity loans are actually a revolving line of credit based upon the equity of your home.  When determining the limit of your credit line for these types of home equity loans, the lender generally works at a percentage of the value of the home.  Many times, this is about seventy-five percent.  From that percent, lenders subtract the amount you still owe on your home in order to help determine the credit limit on home equity loans.

So, in our example above, if the lenders take seventy-five percent of the value of the home in order to determine the basis for home equity loans, the figure they would get is $131,250 or seventy-five percent of your home’s fair market value.  Next, they would subtract what you still owe, which is $75,000, from the $131,250 and come up with a credit limit of $56,250.  This is, basically, how credit limits are determined on home equity loans.

Lenders will also use your credit history to help determine the limit on the amount of credit they might offer you regarding home equity loans.

Generally, for these types of home equity loans, a draw period is set.  The draw period is the amount of time that the lender will allow you to draw, receive money, against this line of credit.  Draw periods can generally run from five to ten years.  Usually, you will be issued a special sort of checkbook that you will use when drawing money on home equity loans.  This checkbook can be used just like an ordinary checkbook, although there may be a minimum amount that you can draw like $300 or $500.  Some lenders also want you to draw money from the account immediately upon setting it up.

Repayment of a HELOC differs greatly from the traditional first mortgage on a home where interest and part of the principal is included in a payment every month.  With the HELOC home equity loans, your designated payment might not include enough principal to repay the loan in full at the end of its duration.  Some of these home equity loans do not make an inclusion for any principal at all.

It is quite possible that you could be facing a balloon payment at the end of your draw period, unless you arrange to pay off the principal during the period of the draw.  That is why it is very important to know the details of home equity loans before you get involved in one.