Home Equity Line of Credit

Home Equity Line of Credit

A home equity line of credit, HELOC for short, is a loan that is set up as a line of credit. A standard mortgage may allow you to borrow $150,000 that gets paid out at closing. However, a home equity line of credit allows you to receive a maximum of $150,000 in different amounts and times you choose. You can draw from your HELOC with a credit card or check.

A home equity line of credit will have two periods; a draw period where the borrower may use it and a repayment period when the loan must be paid back.

How Does HELOC Work?

During the draw period which typically lasts from 5 to 10 years, the borrower makes payments on the interest. During the repayment period which can last from 10 to 20 years, the borrower will pay off the principal. Some HELOCs may require that the balance of the loan be paid off when the draw period ends.

In most cases, home equity lines of credit are second mortgages. Sometimes borrowers will use it to refinance their current mortgage.

Qualify for a HELOC

Advantages of HELOCs

A HELOC is usually a good solution for homeowners who need to meet ongoing needs for cash such as medical bills or school tuition. Many borrowers who are self-employed and/or make irregular income benefit from the flexible nature of a credit line than lump sum loans.

Home equity lines of credit are great for debt consolidation. While a HELOC often has an interest rate that is higher than the first mortgage, the rate will typically be lower than that charged by a private lender or financial institution. This can save borrowers a large significant amount of money on interest payments. Don’t forget that with a HELOC, your home is collateral for the loan.

The following includes the benefits of HELOCs:

  • Convenient way to quickly get funds
  • Interest is only charged after a withdrawal
  • Interest on home equity lines of credit is tax deductible
  • They offer competitive interest rates
Disadvantages of a HELOC

Disadvantages of a HELOC

A HELOC is not always the best choice for homeowners. Payments on home equity lines of credit can shift dramatically, as they are tied to the prime rate and do nott have caps like most adjustable-rate mortgages. All HELOCs are adjustable-rate mortgage loans and market fluctuations can significantly impact a HELOC.

It is not advised for borrowers who have fixed incomes or require a steady monthly payment to take out a HELOC. In these cases, it would be more suitable for the homeowner to take out a home equity loan.

Advantages of HELOCs

Qualify for a HELOC

A home equity line of credit quickly turns the equity in your home into collateral that you can borrow against. The following includes general criteria that needs to be met to receive a home equity line of credit loan:

  • Equity in your home. Most of the time, lenders will not go above 80% of your homes equity, although in some cases borrowers may receive up to 125% of the equity. A home appraisal will be required to verify the amount of equity built up in the home.
  • Monthly housing payments and expenses must not be larger than 28% of your monthly income before taxes
  • Debts you owe must not be larger than 36% of your gross monthly income
  • A good credit score is needed to get a HELOC. Lenders usually want to see a credit score above 700 for a loan covering 100% of the home’s equity.
  • Steady employment in the past two years.
Home Equity Line of Credit

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