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How Does a Home Equity Line of Credit Work?

These days, more often than not, homeowners are familiar with home equity loans and lines of credit. With either loan type, you are able to acquire cash to buy things, consolidate debts or fund home improvement costs.

Most borrowers would agree that getting a heloc and using the equity from your house is blessing and can open up opportunities for you as well.

However, before completing the credit application, homeowners should carefully read and understand the credit line agreement. The amount of your line of credit is always based on your equity in your house and revolving credit extended to you from the lender. For example, if you owe $200,000 on a $300,000 lien, then you have$100,000 in equity and your combined loan to value is 67%.

Will the home equity lending market see a decline in 2nd mortgage origination for 2007? According to affiliates of Home Equity Wire the industry believe the recent decline of home equity loan applications is more of a credit issue than consumer demand result. John Allen, a spokesman for Smart Home Equity commented, "The banks recently tightened their guidelines for second mortgages in the sub-prime market." Allen continued, "We have noticed that application volumes have increased. But just as the lending approvals have decreased, so to have the lending turn-down notifications for applicants because their credit scores mainly in the sub-prime sector.

Why Refinancing Your Credit Line is Smart

If you were one of the thousands of homeowners who take out a home equity line of credit to pay for your home improvements in the last few years you may have noticed that your payments have been rising.

If you have completed the construction to your home remodel it may be wise to refinance your credit line because the interest rate is adjustable.

If your line of credit is maxed out then it is time to refinance it into a fixed rate home equity loan. This will allow you to set up a budget and actually pay back the money you borrowed.

With adjustable rate home lines of credit you are at the mercy of the market and if interest rates are rising, so will your monthly payments. If you are serious about cutting your expenses and repaying the money your borrowed then stop delaying the inevitable and refinance this revolving line into a fixed rate 2nd mortgage.