What is an Equity Line of Credit?

Mary McMahon
Mary McMahon

An equity line of credit is a type of revolving credit account which is based on the equity someone has in an asset such as a home or business. This is a form of secured credit, since the equity in the asset and the asset itself act as security for the outstanding debt in the event that the borrower defaults. People can use equity lines of credit in a variety of ways, ranging from financing business operations to making improvements to a house, and many banks offer this type of credit line.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

When someone applies for an equity line of credit, the bank typically appraises the asset being used to back the line of credit, and it determines how much equity someone has in the asset. If outstanding debt on the asset is present, this debt will be subtracted from the total amount of credit available. After determining how much it feels comfortable lending, the bank will notify the borrower of the amount of his or her credit line.

The borrower starts out with what is known as a “draw period,” referring to a period of time in which he or she may use the equity line of credit for funds. People can draw money in a variety of ways including via checks and credit cards, depending on the terms of their loan. Once the draw period is over, the borrower may be able to reapply, or he or she may enter a repayment period, in which the interest and the principal must be paid off. Different banks have different terms about repayment periods and repayment options.

Having access to an equity line of credit can be immensely advantageous for someone who handles money wisely. The credit can be used to make improvements and investments which will be productive in the long term. However, people should resist the temptation to treat an equity line of credit like free money, because the money will eventually need to be paid off, and borrowers can enter into a situation in which they owe more on an asset than it is worth, or they may struggle with extremely large payments.

When shopping for an equity line of credit, people should ask about interest rates and repayment terms. If borrowers think that they will want to be reapply, they should work with a bank which will consider reapplications. Other considerations include the form which withdrawals will take, and any account minimums. Some equity lines of credit include minimum balance requirements, or mandate that borrowers take out a minimum amount each time they access the line of credit.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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