How to Get a Home Equity Line of Credit?

As a homeowner, you may have heard about the potential financial benefits of a Home Equity Line of Credit (HELOC). But what exactly is a HELOC, and how can it work for you?

In this article, we will explore the eligibility requirements for a HELOC, the process of obtaining one, and the factors to consider when deciding if it’s the right choice for you. We will delve into the workings of a HELOC, including the draw period and repayment phase, and explain the potential advantages and drawbacks compared to other financing options.

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 borrowing 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 the available credit is available as you repay your debts.

The inability of the borrower to meet up with the repayment schedule means a loss of ownership rights to their house.

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Requirements to Qualify for HELOC

HELOC has a simple method of ascertaining your eligibility for their equity line of credit.

They do this by rationalizing your debt-to-income ratio.

The debt-to-income ratio analyzes the percentage of your income channeled toward 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 is worth 15% more than your debts.

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How Does a HELOC Work?

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 is 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 most banks charge and a markup set by the HELOC.

How to Pay Back HELOC?

Repaying your HELOC comes in the succession of two phases.

The first phase is ten years, within which withdrawal can be made against your equity.

This is popularly termed the draw period; you must pay only interest during this period.

You can also repay the principal during this period, which means reimbursement of your credit limit.

The repayment in monthly installments characterizes the second phase.

During this period, you cannot withdraw; principal and interest payments are made in installments within 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 can withdraw from your limit when you need money.

Contrary to the HELOC system, the home equity loan fully withdraws 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.

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 The Benefits of HELOC

One of the most credible reasons to choose a home equity line of credit is refurbishing and renovating 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 paying 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 of obtaining a line of credit with HELOC is fatal if you do not meet 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 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 uneven flow of income exist, avoid taking a HELOC.

Cost of Application: Applying for a HELOC is a little bureaucratic.

It requires several procedures that would cost you money. The odds of repaying the loan are lean if you can’t afford these costs.

Amount of money needed: If you need a small amount, the cost of processing the HELOC may be better than the try.

Unstable Interest rates: If you don’t have an income sufficient to foot an unprecedented rise in interest rates, it is unsafe to take a HELOC.

Purpose of the loan: If the goal is not wealth-generating, it is safe to avoid a HELOC.
People having trouble making ends meet or who need money to run daily expenses should avoid this loan.

Signing-Up for Better Deals

To get the best HELOC rates, compare the offers of various lenders and choose the best suitable for you.

I think a lot should focus on the lender’s limit of fluctuating interests; also, check with your Primary mortgage for profitable deals.

Before you apply 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 need an appraisal after you agree to the terms of the disclosure.

Conclusively it is important to state that taking a HELOC loan hurts your credit score.

This is because it is considered a full monetary loan rather than an intermittent source of credit.

Could you speak to a financial adviser to weigh the odds before you take up a HELOC?

Conclusion

In conclusion, a Home Equity Line of Credit (HELOC) is a flexible mortgage option that gives homeowners access to funds based on their home’s equity. It operates as a withdrawal system rather than a lump sum credit transfer. The borrower’s home serves as collateral for the credit obtained.

HELOCs offer advantages such as the ability to borrow as needed, lower initial monthly payments, and potential tax deductibility of interest. However, it’s essential to carefully consider eligibility requirements, debt-to-income ratio, credit score, and repayment obligations.

Choosing between a home equity loan and a HELOC depends on individual needs and preferences. It’s crucial to weigh the advantages and drawbacks before making a decision. Consulting a financial adviser can provide valuable insights into the suitability of a HELOC for personal circumstances.

Frequently Asked Questions

What Is A Home Equity Loan of Credit (HELOC)?

A Home Equity Line of Credit (HELOC) loan allows homeowners to borrow money using their home’s equity as collateral. It operates like a revolving line of credit, similar to a credit card, with a predetermined credit limit.

HELOCs typically have variable interest rates, but some may offer fixed interest rates. During the draw period, which is usually 5-10 years, the borrower can access funds and pay interest only on the amount withdrawn. After the draw period ends, the repayment period begins, during which the borrower makes monthly payments of both principal and interest.

HELOCs can be used for various purposes, including debt consolidation, home improvements, or major purchases. However, it’s important to consider the risks associated with HELOCs, such as the potential for rising interest rates and the risk of losing the home if timely payments are not made. Additionally, the interest paid on a HELOC may be tax deductible in certain situations.

Why is HELOC popular?

Home equity loans are a popular option for homeowners to access funds based on the value of their property. For example, a home equity loan allows you to borrow money using your home’s equity as collateral. With a fixed interest rate, you pay interest and make monthly payments over a repayment period. Another option is a home equity line of credit (HELOC), which offers a credit limit you can draw from as needed. HELOCs often have variable interest rates and a draw period before you start making interest payments. Closing costs and credit history are relevant factors when applying for these loans.

How does a Home Equity Line of Credit (HELOC) differ from a home equity loan?

While both a home equity loan and a HELOC allow homeowners to access funds based on their property’s value, there are key differences. A home equity loan provides a lump sum of money upfront, while a HELOC offers a revolving line of credit that can be drawn upon as needed. Home equity loans usually have a fixed interest rate, whereas HELOCs often have variable interest rates. Home equity loans require regular monthly payments, while HELOCs often have a draw period before repayment begins.

Published on September 8, 2019; Updated on June 21, 2023.