You don’t have to sell your home if you want equity.
Home equity lines of credits (or HELOCs) are flexible credit products that allow you to tap into the equity in your home without having to refinance or sell it.
Learn about HELOCs and the requirements you must meet before borrowing.
What is a HELOC (Home Equity Line of Credit)?
Home equity lines of credit are secured credit cards that you can borrow against. HELOCs are different from home equity loans, which provide cash as a lump-sum. Instead, they offer you a credit limit that you can use to borrow, with interest only being charged for what you actually spend.
If you need money to cover ongoing expenses, HELOCs are a good option. This is because you can only borrow what you really need.
If you are working on home improvements, you can use a HELOC as a way to purchase materials rather than taking out large loans and budgeting the money.
Which requirements are there for a HELOC?
The requirements for HELOCs may vary depending on the lender. Here are some guidelines to keep in mind.
Home equity
Your home equity, which is your equity stake in your house, is a major factor for HELOC approval. This is because it is your equity that you are borrowing against. HELOCs require that you have at least 15%-20% equity in your house.
DTI Ratio
The debt-to income (DTI), ratio tells lenders whether you are able to afford new debt. Calculate your DTI by multiplying 100 by the total of your minimum monthly payments.
A lower DTI can increase the chances of being approved.
Credit Scores
Credit scores are a measure of the quality of your credit history and how likely you are to pay on time. Credit scores of at least 680 may be required to qualify for HELOCs, though a higher score could mean a lower interest rate.
Income
The DTI is calculated using your income and used as a measure of how well you can repay the credit. To prove your income, lenders may request pay stubs or bank statements.
What is the maximum amount you can borrow using a HELOC?
Your HELOC credit limit is determined by your credit score, your house’s value and the amount of equity that you possess. Credit limits are generally between 80% and 90% of the equity in your home. Having a lot of equity will increase the amount you can borrow.
How can a HELOC be used?
HELOCs are not restricted in what they can be used for, but the tax benefits can make them a great option for home improvement projects. The interest you pay on a HELOC can be deducted if the funds are used to upgrade your house and increase its value.
HELOCs can be used for a variety of expenses, including education, travel, and medical costs.
HELOCs are risky despite their flexibility. You could lose money if you borrow a HELOC to buy a vehicle. If you can’t make the payments, your home could be at risk.
The advantages and disadvantages associated with a HELOC
As with most financial products there are both pros and cons when it comes to taking out an HELOC. What you should know.
Benefits of HELOC
- Flexibility in repayments. The lender may allow you to withdraw money using a check or credit card, followed by a period of repayment. You may spread the repayment over a number of years, or be required to pay off your entire balance in one go.
- HELOCs may have lower annual percentage rates compared to credit cards. Because they are secured by the home as collateral, their interest rate is likely to be lower than that of unsecured credit. HELOCs can also offer a low interest introductory period that could save you money compared with personal loans.
- On-time payments could improve your credit score. On-time payment could improve your credit score if you pay on time.
- You may be able to deduct interest on a HELOC if you used the funds for home improvements.
The disadvantages of HELOC
- You can use your house as collateral. The loan is backed by your house, so you may lose it if you are unable to repay the HELOC balance.
- Rates of interest could rise. HELOC interest rates are typically variable and may increase.
- A balloon payment could be a possibility. You could have to pay a large amount if the entire credit card balance is due at the end of the drawing period.
- Equity is lowered. Equity or home ownership is reduced when you borrow against equity. You’ll make less money if you decide to sell your house because you will have to pay off your HELOC.
What’s next?
You can shop around for the best terms if you are interested in getting a HELOC. HELOCs can come with closing costs and appraisal fees.
You can also borrow money from your home equity by taking out a loan or doing a refinance. Comparing these options to HELOCs will help you determine the best way to borrow.