Equity Lines of Credit

In recent years, lenders have been more accommodating to brokers, by offering programs for equity lines of credit.
Over the last couple of years, lenders have been very aggressive with brokers and now we have an avenue to do equity lines of credit for all of our customers. In fact, we do quite a few of them. Following is an explanation of how an equity line of credit works.

Explain the advantage of an equity line of credit, in that it is tax deductible.

An equity line of credit is a 2nd Trust Deed because the line of credit itself is attached to your property. An equity line of credit has interest-only payments for 10 years. After 10 years, you start to repay whatever balance is left for a period of 15 years. In other words, it becomes a fully-amortized 15-year note at the conclusion of the 10-year interest-only period. Therefore, this is a 25-year loan if you choose to stay in it that long.

There are some interesting facets to an equity line of credit which make it a very valuable loan. It allows you to control your payment and cash flow on a monthly basis and because you have an interest-only loan, you can make a minimum payment and still tread water. Beyond that, you can pay extra money towards the principal any time you want.

The nice thing about it is that your payment is based upon the existing balance you presently owe. Let me give you an example. Let's say you have an equity line of credit with a monthly payment of $100 based upon the fact that you currently owe $25,000. If you pay an extra $2,000 on that line of credit this month, then next month your balance is $23,000. Like a credit card, when your payment coupon arrives the next month, your payment will immediately decrease because that payment is based on the balance you owe, not on the original indebtedness as in a fully-amortized fixed rate note.

Where it differs from a credit card is the fact that it's tax deductible. This is the part of the equity line of credit everyone really likes. In fact, you can take all of your credit card debt and pay it off with one new loan as an equity line of credit, thereby creating a tax deduction you don’t presently have with your credit card debt. Beyond that, another interesting component to it is the ability to draw back against it at any time.

What happens is that you get a checkbook in the mail when you receive your first payment coupon. This checkbook is your means for drawing back against the equity line once you have paid it down. If you originally borrowed $25,000 and over the course of three years you pay the note down to $18,000 and then decide you need to borrow money to buy a new car, you can write a check against that line of credit.

This way you could pay for the car on your equity line and have it become tax deductible. It adds flexibility and increases your tax write-off. An equity line of credit is a great loan for the right occasion.