If you’re a homeowner and have been exploring your credit options, you may have come across the Home Equity Line of Credit Loan. Simply put, a home equity line of credit is the appraised value of your home minus the amount of mortgage still owed. HELOCs can be useful methods of credit if used properly. Let’s take a moment to break down home equity lines of credit to help you determine if obtaining one is right for you.
How Much Can I Get?
Most homeowners will begin determining if the HELOC is right for them by asking how much they get if the line of credit is approved. While the hard numbers vary based on the lender, typically HELOCs are based on 85% of the appraised value of your home. The remaining amount of the mortgage is subtracted from the total, giving you the amount of equity, you could access. However, it’s important to also factor in other costs that go into the process such as the appraisal and closing costs.
What Do I Need to Qualify?
Other than the obvious stipulation of being a homeowner who has paid off at least a portion of their mortgage, your debt to income ratio needs to be low for most lenders to even consider you for an HELOC. Typically, it is recommended that your debt to income ratio be near 40% or lower to secure a HELOC, though different lenders will have different standards.
What's the Catch?
The key factor that makes an HELOC different from other kinds of loans is that you’re putting your home up as collateral. This means that if you default on your loan, the lender can foreclose on your home. Additionally, most home equity lines of credit have variable interest rates, which means your monthly payments may vary. This can be a challenge for some unprepared borrowers.
What Are HELOCs Used For?
Here are some situations where you may want to use a home equity line of credit.
Home Renovations and Remodeling
Home renovations are expensive. As such, you may not have all the available cash on hand. If you’re wanting to make updates to your home, this loan can be useful tool to make that a reality. Additionally, many home sellers will use HELOC to remodel and increase the value of their home before going to market.
Help Afford College Tuition
College costs have skyrocketed in recent years, and yet higher education to our kids remains important to their long-term financial success. A home equity line of credit could be a useful tool to help manage the cost of college.
Lower Interest Rates and Debt Consolidation
While some HELOCs have variable interest rates, those rates are typically lower than traditional lines of credit. This allows borrowers to work towards consolidating their debt. It’s important to consult with your financial institution to see if HELOC would be a useful tool to help you consolidate your debt, as the situation may differ for each individual.
Want to Learn More About a Home Equity Line of Credit?
The team at Your Credit Union is here to help you walk through the complexities of HELOCs. Our Consumer Loan Officers can help review your financial situation, look at your long-term financial goals, and help you make the decision that is right for your family’s future. Contact us today to get started.