Home Equity Line Of Credit
The single largest investment the majority of individuals will ever make is their home. It usually takes decades to pay off, but once it is, homeowners have a great deal of equity in the house, which can make up a large portion of their net worth. At times, such as when they want to make improvements or additions to the home, some homeowners choose to borrow against the equity in a home. But what exactly does it take to do this and is it a good idea for your situation? Continue reading to learn some of the basics about what it means to take a line of credit against the equity in your home.
What Is A HELOC?
A home equity line of credit (HELOC) is a tool used by lending institutions to lend money for a variety of needs. It can be used in a variety of scenarios in which someone owns a portion of or their entire home. The equity value of the home can be viewed as collateral against the money you are borrowing from a lending institution. A HELOC is different from a traditional mortgage, which is extremely attractive to those who don’t want to lock into such a long-term commitment. Money can even be borrowed against the value of the home to make improvements to increase the home's value in the long run. Before jumping into any major financial decision, it is imperative to research the process thoroughly so you know exactly what you’re getting into.
Continue reading to find out how a HELOC works.
How A HELOC Works
A HELOC has a predetermined period on which you can capitalize on the agreed up amount of credit the equity in your homes is worth. During this time frame, you can choose to draw upon part or all of the line of credit in as many separate transactions as desired. Depending on the lending institution you have agreed to terms with, there may be associated fees with each transaction so there may be times when it is better to plan and only make a single withdrawal from the total value. There is also a specified term in which the money must be paid back. The length of this payback term is usually determined by the amount of the equity used. Although you may have a longer period to pay back a larger sum of money, the associated interest rate can also be higher as well. While a HELOC is still a great choice for many homeowners, self-funding projects will always be the cheapest option.
Continue reading to learn about qualification requirements.
Qualifying For HELOC
The first thing a lending institution will look at before deciding if someone qualifies for a HELOC is their credit score, which will determine the likelihood of whether or not they have to ability or likelihood to pay back the line of credit they are borrowing against. Lenders typically look for a credit score of 740 or higher to provide the best rates. While lower credit scores do not disqualify you, it may lead to a much higher interest rate in the long run. The second main consideration for whether or not someone qualifies for a HELOC program is whether or not they can keep somewhere between ten and twenty percent of their home equity. This means HELOC loans cannot be taken early in home ownership because enough equity has not yet been built. It is best to check with the specific lending institution for their exact requirements on this matter.
Continue reading to learn about the major positives of a HELOC.
Pros Of A HELOC
One of the biggest positives of a HELOC program is the fact there are no closing costs. A mortgage usually involves closing costs, which means the total cost for the property is actually higher than face value. There are also tax advantages to a HELOC program, including because this is a government-sponsored program, the interest you pay during the payback period is almost always tax deductible. This lowers your overall tax bill and may result in a bigger tax return each year.
Another positive about a HELOC program is the fact there are very low interest rates available. While private loans are available for different projects, these usually come with high interest rates, which can quickly balloon up the total price of the project over time. Perhaps most importantly is the fast available cash it can provide. This can be a huge savior to homeowners in desperate need of capital for extremely important events in life.
Continue reading to reveal the disadvantages of a HELOC.
Cons Of A HELOC
The first and perhaps most glaring negative aspect of a HELOC is the possibility of foreclosure. Those who use the full value of a HELOC usually find themselves owing more money on the house than what it is actually worth. If you are unable to repay the credit borrowed against, foreclosure proceedings can begin, and you can be left without a home.
Another con about a HELOC program is the interest rates can be variable and change virtually overnight. HELOC program interest rates are usually set based on the prime rate, and as this changes, so does the interest rate you are forced to abide by. This can cause what once looked like a great deal to soon become a financial burden. The best way to avoid financial stresses is to borrow only as much money as you need. By minimizing the amount borrowed in the first place, you are lowering the amount of interest you must repay and increasing the possibility of benefiting handsomely from the program.