A home equity line of credit is another type of loan available to homeowners to borrow against the equity in their homes. These loans are often referred to as second mortgages since they use the equity in a home as collateral. Homeowners typically need at least 20% equity to qualify, although credit, income, and assets do have a factor in approval. It works much like a credit card, where you are approved for a line amount and borrow as-needed, only paying back the balance typically with terms less than 15 years.
These funds can be used a number of ways, such as paying for much-needed home improvements like a kitchen or bathroom remodel, college or medical expenses, or even to start a business. A home equity line of credit is a great way to have easier access to funds without a full refinance of your current mortgage. Since the mortgage process can be overwhelming in general, it’s a good idea to discuss the pros and cons with a mortgage professional to see which is right for you. You can also educate yourself further from the comfort of your own home just by checking out the Home Equity Wiz blog, they have plentiful tips and resources that are free to use.
It’s Less Complicated than a Refinance
If you remember the grueling process when you purchased your home or even completed a refinance as rates have fallen as of late, you remember the number of documents you had to submit for approval, and even more if your credit or debt-to-income ratio needed explanation. With a home equity line of credit, there is still an approval process, but provided the loan-to-value is less than 80% and you have sufficient credit and income, you should see favorable approval terms. In addition, with a traditional refinance you’ll need to pay fees to the lender and title company which could be in the thousands of dollars. With a HELOC, you may have limited fees, especially if you go through your local credit union.
As credit card balances continue to rise and you begin paying the high-interest rates each month on the balance you’re carrying over, the feeling of sinking in financial quicksand can take shape. There is a bright side though, as these lines of credit typically have lower interest rates than credit cards, so you can combine outstanding debt balances into one payment. This should ultimately be a ‘pro’ as you work towards getting out of debt, but you should also be aware that this will open up the available credit on your existing cards now that they’re paid off, avoiding any temptation of racking up the balances again.
Variable Interest Rates
While it may be a low-cost way to borrow money to start, but the variable interest rates can increase monthly payments quickly if the benchmark rate goes up. You’re sort of testing the market and there’s no way to predict performance. Your line of credit will likely have a maximum it can rise to, but if you figure that wide range, even if it’s now at 5% and could go to 10%, that’s a significant increase on your monthly payment depending on the balance. If this scares you, there is also the option of a home equity loan, where you can have fixed payments over the life of the loan.
Brought to you by Justin Weinger.