How to Get a Home Equity Line of Credit?
A home equity line of credit is a mortgage system that gives you monetary aid after evaluating the worth of your home. The financial assistance comes as a withdrawal system rather than a full transfer of credit.
Getting a Home Equity Line of Credit
HELOC uses the house of the borrower as collateral for this credit.
Having evaluated the monetary worth of your house by their standards, you are borrowed money (at least up to 85%) based on the value of your home minus any debt on your primary mortgage.
The exciting offer typical of HELOC is that as you repay your debts, the available credit at your disposal.
The inability of the borrower to meet up with the repayment schedule means a loss of ownership rights to his/her house.
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Requirements to Qualify for HELOC
HELOC has a simple method of ascertaining if you are eligible for their equity line of credit.
They do this by rationalizing your debt to income ratio.
The debt to income ratio is an analysis of the percentage of your income channeled towards repaying your debts.
It is calculated by dividing your monthly debts by your pre-tax income.
To qualify for HELOC, you must have:
1. Debt to income ratio score lesser than 39
2. A credit score above 620
3. Good repayment and employment history
4. The home value worth 15% more than your debts.
How a HELOC works
HELOC permits you to borrow from your equity, repay and borrow again.
Most finance personnel refer to this system as a credit card; the faster you repay, your equity is replenished, and you can borrow anytime.
To know your credit limit, calculate by multiplying 85% by the monetary value of your home minus the balance on your mortgage.
For example, your house worth $600,00 and you have a balance of $200,000 on your primary mortgage.
Your HELOC limit would be $600,000 multiplied by 85% minus $200,000, which equals a 310,000 limit.
One of the setbacks with the home of an equity line of credit is that its interest rates are variable.
It fluctuates between the prime rate charged by most banks and a mark-up set by the HELOC.
How to Payback your HELOC
Repaying your HELOC comes in the succession of two phases.
The first phase is characterized by a period of ten years, within which withdrawal can be made against your equity.
This is popularly termed the draw period; during this period, you are required to pay only interests.
You are also allowed to pay back the principal during this period as it means reimbursement of your credit limit.
The repayment in monthly installment characterizes the second phase.
During this period, you cannot make withdrawals; payments of principal and interest are made in installments within a period of at least twenty years.
Home Equity Loan or Line of Credit?
The home equity line of credit operates as a credit card system; that is, you are allowed to make withdrawal out of your limit when you need money.
Contrary to the HELOC system, the home equity loan provides a full withdrawal of your limit at once.
The advantage of the home equity loan is that the interest rate is fixed, and you are entitled to the whole loan at a go.
Why you can consider a HELOC
One of the most credible reasons to choose a home equity line of credit is for refurbishing and renovation of your home.
This is because refurbishing and improvement of your home increase its value.
Aside from increasing the value, the IRS proposes a reduced tax on the payment of your interests.
As with other forms of loans, it is wise to spend money on what builds wealth rather than consumes wealth unnecessarily.
Urgent needs like educational bills can also be sorted through this line of credit.
Reasons Why You Should Avoid a HELOC
The risk attached to obtaining a line of credit with HELOC is fatal if you do not meet up with your repayment schedule.
It means you lose access to your home.
Since HELOC is a secondary mortgage, it is safe to assume that a person who cannot meet the repayment schedule would be rendered homeless after this fatal consequence.
A fatal consequence can be avoided if you avoid taking a loan in situations such as:
Unstable income: If the odds of an unstable flow of income exist avoid taking a HELOC.
Cost of Application: The process of applying for a HELOC is a little bureaucratic.
It requires several procedures that would cost you money if you can’t afford these costs the odds of repaying the loan is lean.
Amount of money needed: If you need a little amount of money, the cost of processing the HELOC may not be worth the try.
Unstable Interest rates: If you don’t have an income sufficient to foot an unprecedented rise in interest rates, it is not safe to take a HELOC.
Purpose of the loan: If the purpose of the loan is not wealth-generating, it is safe to avoid a HELOC.
People having trouble to make ends meet or who need money to run daily expenses should avoid this loan.
Signing-Up for Better Deals
To get the best of HELOC rates compare the offers of various lenders and choose the best suitable for you.
Major emphasis should be placed on the lenders limit of fluctuating interests, also check with your Primary mortgage for profitable deals.
Prior to your application for a loan calculate your equity by HELOC standards; after which you search for the best deal available.
Document the Request
Read through disclosures thoroughly and ask questions from your lender before sealing the deal.
You may require an appraisal after agreeing to the terms of the disclosure.
Conclusively it is important to state that taking a HELOC loan has a negative effect on your credit score.
This is because it is considered a full monetary loan rather than an intermittent source for credit.
Speak to a financial adviser to weigh the odds before you take up a HELOC.