Line of credit
Mortgage Dictionary -> Line of credit
Many people find themselves in situations in which they need to purchase an item but do not have the cash available to make the purchase. For this reason and many others, this has lead to the opening of many lines of credit. By definition, a line of credit is any credit source that is extended to a consumer or business by a financial institution. Lines of credit come in several forms and can be used to purchase anything the consumer wishes. This line of credit can also be opened and reserved for emergencies instead of being used immediately.
One line of credit that many people have in their possession is a credit card. A person who opens a credit card account is being granted a line of credit by the lending institution the card is from. After the person has applied for and been approved for the line of credit, he or she is free to spend it on anything they would like. However, the consumer is expected to make on-time monthly payments to the lending institution. These payments are calculated by the lender and include a portion of the overall balance as well as interest. As the borrower pays down the portion of the line of credit they have used, it becomes available for use again.
Another popular line of credit is a home equity line of credit. This line of credit, often called a HELOC for short, uses a person's home as collateral. If the borrower does not make the required monthly payments, the lending institution is able to take the customer's home as payment. The amount of a home equity line of credit is determined by appraising the home and determining its value. After this has been completed, the amount that the customer currently owes on the property is deducted from the appraisal price. This is the amount of equity that the customer currently has in the property. The amount of the credit line can be any amount decided by the lender up to the amount of equity the customer has in the property. Many people use home equity lines of credit for remodeling projects, medical bills, or bill consolidation. This line of credit works exactly like a credit card; as the borrower pays back the used portion of the credit line, it once again becomes available for use. This can be very convenient for those wanting to perform major repairs to their house, or for those with mounting medical bills.