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How They Work

Most home equity loans these days are arranged as a line of credit. Based on the appraised value of your home and the remaining balance on your primary mortgage, the lender issues you a line of credit for a certain amount. You are given a checkbook you use to draw on the credit, sometimes with a restriction on the minimum amount you can write a check for (for example, $250) or the maximum number of checks you can write per month. The monthly payment you must make on a line of credit varies with the amount you owe and the current interest rate. A typical minimum monthly payment would be 1.5% of the outstanding balance. There is usually a dollar minimum payment that comes into play at low balances.

Look for Additional Value

Some banks offer additional value if you take out a home equity loan with them. Perhaps the most common enticement is a free or reduced cost checking account. For instance, I have my checking and home equity credit line at the same bank. As long as my home equity balance remains about $5,000, the checking account is free. This is a premium account with online banking and lots of other extras, and the normal cost is $25/month. That’s a significant savings!



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