HELOC is -Home Equity Line of Credit.
To understand HELOC, we must know what’s an equity and what’s a credit line is?
Equity can be defined as the net value of an asset or simply, Assets -Liabilities = Equity.
Consider you have CAR and the current market price of that CAR is 100,000 $, however you taken a loan against this CAR for 60,000 $, the equity of your CAR would be only 40,000 $.
Now that we understand what an equity is, let’s learn about credit line.
Credit line is also called as facility for a customer, it’s a calculated amount derived based on your credit scores, repayment history, net income, sources of income and many under factors primarily considered during underwriting stage and a credit limit is defined by the bank.
This is the limit that the Bank is comfortable to offer you for your spending. The Bank ensures that you are capable enough to repay the amount from your earnings or assets.
Let’s get deeper into the topic and understand different types of credit lines. Line of credit (also called as facilities) are majorly of two types- Revolving Credit Line and Non-Revolving credit line.
Revolving credit line is something like your credit card. To be precise, as soon as you make a payment the available amount goes up and you can further utilize the limit again and again as long as you are making payment.
However, Non-revolving credit line is the one which if utilized once, can’t be increased by making payments.
Let’s take an example if the credit line amount is 100,000 $ and the customer utilizes 20,000 $, the available amount in the credit line would come down to 80,000 $ and the customer repay 5,000 $, the available balance again goes up to 85,000 $, this is an example of revolving credit line. On the other side if the available amount does not raise up and remains 80,000 $ even after making a payment of 5000 $ is an example of non-revolving credit line.
Now, we can easily understand HELOC and how it works. As, I wrote in the first example regarding CAR equity, in case of HELOC the asset is a ‘HOUSE’ for which customer has taken a loan. We may refer it as a mortgage loan also. Also, the line of credit is a facility that is offered to a customer by the Bank based on the credit score. Therefore, HELOC is a House Equity Line of Credit, where based on your equity against a housing loan a credit line is issued by the bank.
Let’s take an example here, you have taken a loan of 900,000 USD for a house and now your ‘HOUSE’ is your primary asset. However, your liability is complete 900,000 USD and Equity as ‘Zero’ as it was financed by your bank. Guys, It’s just an example as in most cases a minimum of 20% equity is required to avail a housing loan.
Now, as soon as you start making payment towards your housing loan, your equity starts building up.
Let’s assume, you have settled your loan for 100,000 USD and the remaining liability is 800,000 USD. The bank may choose to offer a HELOC for 80,000 USD after keeping aside a margin based on your current equity which is 100,000 USD.
This 80,000 USD HELOC can be utilized further for your spending on a lower interest rate offered by the bank. Please note that HELOC is a revolving line of credit and it gets increased as soon as you make a repayment.
I hope this article would have helped you to understand HELOC in detail. Please share your reviews and comments below. Thanks!!!!!!!!!