Equity Line of Credit
An equity line of credit is a line of credit that is secured by the equity in a home or property.
These are often Home Equity Lines of Credit (HELOC) for personal loans, but businesses may take out equity lines of credit as well.
How to Get an Equity Line of Credit
To qualify for an equity loan, you must have equity available in your property.
This means that what you owe on the property must be less than its value.
For Home Equity Lines of Credit (HELOC), you can typically borrow up to 85% of the equity in your property minus what you owe.
Equity Line of Credit on Investment Property
It is possible to take out an equity line of credit on an investment property, but the qualifications are more stringent.
You will likely need a credit score of at least 680, a significant amount of cash at the ready, and a history of successful real estate investment.
Do You Need a Reason to Open an Equity Line of Credit?
You do not need a reason to open an equity line of credit, but there are strict requirements to qualify and opening one can have serious implications.
Using a home or property as collateral for a line of credit puts the assets in needless risk.
Line of Credit Definition
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What Is a Line of Credit?
A line of credit, or LOC, is money lent to an individual or business which the borrower pays interest on.
Depending on the type of LOC, the client either receives a lump sum, or is allowed to “draw against” their line of credit to make purchases, until the credit limit is reached.
Typically lines of credit are given by banks, such as when an individual is issued a credit card.
What Is a Line of Credit and How Does it Work? Revolving vs Non-Revolving
Lines of credit will either remain open, or will close, once the loan has been repaid.
Revolving lines of credit are considered “revolving” because an individual’s credit is replenished when some or all of the outstanding debt has been paid off.
In contrast, a non-revolving line of credit is closed once the account is fully paid off, such as a student loan or mortgage.
Non-revolving credit usually has a lower interest rate.
How Does a Line of Credit Work? Secured vs Unsecured
Loans may be unsecured loans, or secured by collateral.
A home equity loan is an example of a collateralized loan, whereby the home is the collateral and will be claimed by the creditor in the event of a default on the loan.
Credit card loans are almost always unsecured, which causes creditors to take on more risk and is why credit card interest rates are generally higher and the borrowing limits are generally lower than secured loans.