Borrowing money based on the equity in your home.
Working much like a credit card, your HELOC balance can vary as can your monthly payments. Read on and we’ll explore what you need to know about a HELOC.
Not a HEL — Both a HEL and HELOC are based on the amount of equity built up in your home. From there, the similarities end. With a HEL, your full loan amount is paid as soon as the funds have been dispensed — your first payment is due almost immediately. With a line of credit, you can get approved for the same amount of money, but you do not owe anything until you begin to draw down your credit line.
Your Credit History — Before you begin to apply for credit, you will want to know your credit history. Your credit score is a 3-digit number that lenders will use to determine your creditworthiness and your loan rate. Even if you have sufficient equity in your home, you may be denied a loan if you have bad credit. Visit AnnualCreditReport.com to review your credit reports for free and make corrections and changes as necessary.
Your Credit Line — Your home is worth $200,000 and you owe $120,000 on your loan. That means your equity is $80,000. In more generous times, you would might have received a loan equaling up to 90 percent of your equity or $72,000. These days, you’ll be lucky to get 80 percent or $64,000. In any case, apply for a credit line that matches your needs.
Your Lender — Your current lender may be willing to extend a HELOC to you. This is a natural place to look and you may be able to save loan closing costs by working with your current mortgage representative. You will also want to shop around — rates can vary and a third-party can offer you a loan that comes in a bit lower than your current lender.
Best Uses — You can use your credit line in whatever way you want. Most people have a line of credit to cover home repairs, maintenance, renovations and other home improvement projects. A HELOC does not keep you from using your line to pay down debt, to pay for your child’s college or even to buy a frivolous item such as jewelry or taking a vacation.
Shop Around — Now back to borrowing. When you search for a HELOC, compare terms and explore your repayment options. Some HELOCs want full payment within five years, others may allow you to extend repayment for 15 years or longer. Be aware of your fees — even if you don’t draw down your funds, your bank may charge you an annual fee to maintain your account. Your draw down time can be limited too, so know what those details are before signing a contract. Also, you bank can reduce or freeze your HELOC with good reason at any time notes the U.S. Comptroller of the Currency. Consider having your accountant review your loan materials once you settle on a particular lender.
Loan Considerations
As with any borrowing that involves using your home as collateral, a HELOC must be repaid. If you default on your payments, your home can be foreclosed. Moreover, your good credit can be compromised and take years to mend. If you want more certain borrowing terms, then a home equity loan may be the better borrowing option for you.
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