Homeowners juggling mortgage payments, utility bills, and other household costs may be struggling to find extra funds at the end of each month. If you’re a homeowner who needs cash to pay for a home renovation, emergency medical bills, or other big-ticket expenses, you may have considered taking out a home equity line of credit (HELOC).
Home equity lines of credit are commonplace in the United States: The Federal Reserve Bank of New York estimated that in 2019 Americans’ balances on HELOCs were $406 billion, with the average loan valued at $49,929. 카지노사이트
Between HELOCs, cash-out refinancing, home equity loans, and even personal loans and lines of credit, your head may be swirling with options.
If you’re zeroing in on a HELOC, here’s everything homeowners need to know about this loan product, including its pros and cons, and how to get your application approved.
What is a Home Equity Line of Credit (HELOC) and How does it Work?
In a nutshell, a HELOC lets homeowners tap into the equity they’ve built up after making mortgage payments over the years. You’re putting your home equity on the line, though. If you fall behind on payments or default on your loan, you’ve used your property as collateral.
In its simplest form, a HELOC is just like a personal line of credit or a credit card. You’re provided with a credit limit – this is the maximum amount you can borrow from your account so you can withdraw only as much as you need to. When you make loan repayments, you can replenish your account so you can borrow these funds again.
Essentially, with a HELOC, you aren’t getting a lump sum of cash like you would with a home equity loan or a cash-out refinance, but an account that allows you to make withdrawals. However, you must remain below your credit limit.
How Much Can I Borrow with a HELOC?
How much lenders may qualify you for depends on the equity you’ve built up. Typically, homeowners can borrow between 60 to 85 percent of their home’s value, minus their outstanding mortgage balance, according to Experian.
If your home is worth $350,000, and you have $240,000 in home equity and owe $110,000 on the mortgage, you might be able to borrow up to $204,000. The amount will depend on your home equity, first and foremost, along with your income and ability to make debt repayments. Your credit score is another determining factor. 안전한카지노사이트
It’s worth flagging that if your home decreases in value, your lender may decide to decrease your credit limit.
How do I Repay my HELOC?
Your HELOC comes with a “draw period,” which is the timeframe when you can withdraw cash from your account. During the draw period, you’re responsible for making at least the minimum payments (loan principal plus interest) on your HELOC, the Consumer Financial Protection Bureau says. The draw period is typically 10 years, and once it ends, you will no longer be able to borrow money on your line of credit.
After, you’ll need to repay your entire balance either all at once or over a certain timeframe, typically another 10 to 20 years. The CFPB notes that this period, called the repayment period, may come with much more substantial loan repayments compared to the draw period, so you’ll need to make sure your monthly budget can manage this debt.
In some cases, you won’t pay off your entire balance by the end of the repayment period term. The CFPB states you’ll need to pay off the remaining balance as a single lump sum amount, known as a “balloon payment.” Make sure you have the savings on hand to pay for this debt, especially with your home on the line. Some homeowners end up refinancing the remainder of their loan, too.
Do HELOCs Come with a Fixed or Variable Interest Rate?
While home equity loans come with a lump sum of cash repaid in installments over a fixed period, HELOCs are a bit more fluid. As we mentioned, HELOCs are a line of credit, so you can withdraw funds whenever you want during your draw period. They also come with a variable interest rate traditionally, so your rate – and, in turn, your repayments – will fluctuate from month to month, according to the CFPB.
Your interest rate will tie closely to market conditions and the prime rate, which is the interest rate banks are charged to borrow. (The prime rate dictates interest rates for everything from mortgages to home loans and even savings accounts!)
In 2021, for example, the average interest rate for a $50,000 HELOC was about 4.14 percent, according to S&P Global data. AMEX says historically, HELOCs have had interest rates averaging 1.99 percent to 7.24 percent.
But your credit score, location in the country, and the loan-to-value ratio (the percentage of your property’s value allocated to your loan) of your HELOC will play a role in your interest rate, too.
(Some lenders allow borrowers to lock in a portion of their HELOC balance under a fixed rate. If this is important to you, ask your shortlist of lenders you’re considering applying to if they offer this feature.)
What Can I use my HELOC for?
Well, virtually anything! Once your lender approves your HELOC application and sets up your account, you’ll have access to your funds for the entirety of your draw period.
There are good and bad reasons to use your HELOC. Favorable reasons include: 카지노사이트 추천
Paying for major home improvements and renovations. This is the No. 1 reason homeowners leverage their home equity to take out a loan. Kitchen renovations, roof repairs, adding an extension to the property – these are all costly endeavors. HELOCs are a great way to finance home improvements because you can withdraw funds as needed, and overall, the result will add to your home’s value.
Financial emergencies. Whether you’re dealing with unemployment or unforeseen medical bills, a HELOC can help you get through financial difficulties.
Paying off credit card debt. With interest rates of up to 7.24 percent, managing debt on a HELOC is much easier than on a credit card with interest rates in excess of 19.99 percent. Some people choose to consolidate their high-interest debts, so they only have their HELOC to pay.
Try not to use your HELOC for starting a business, paying for vacations, or investing. You’re putting the roof over your family’s heads at stake!
How do I Qualify for a HELOC?
Bear in mind that each lender will have their own set of eligibility criteria to meet to qualify for a HELOC, but overall, homeowners can expect these baseline requirements, according to American Express.
Home equity. Most lenders will insist you have at least 15 to 20 percent equity in your home. AMEX notes that the more equity you have, the more likely you’ll be able to qualify and take out a HELOC.
Good credit and credit history. Your aim is to make sure you have good to excellent credit, in the mid-600s at least, to increase your odds of getting approved for a HELOC. Solid credit history will also show lenders that, historically, you’ve managed your debts well. With your home equity as collateral, you may still qualify with a fair credit score, but you’ll have to deal with higher interest rates.
A reasonable monthly debt-to-income ratio. Lenders will want to know if your income is sufficient to stay on top of your loan repayments. Debt-to-income ratio is the percentage of your gross monthly income that goes towards paying your existing debts. Make sure your debt-to-income ratio is low, at 43 percent at the highest, but the lower the better. Add up your existing debts to see how much of your income is spent on debt repayments before making your case to lenders.
Proof of employment. Finally, get your pay stubs, bank statements, or a letter of employment ready; your lender will need proof of employment and income to approve you for a loan.
Do HELOCs Come with Additional Fees?
When you’re shopping for any kind of loan, your job is to zero in on the fine print, including the additional fees and charges you may be on the hook for. This is a great way to compare lenders before you make a decision, too.
While HELOCs are convenient, getting them set up comes at a premium. Here’s a look at some of the fees you may incur when dealing with a HELOC:
Appraisal fees (for getting your property’s value assessed)
Loan application fees
Mortgage preparation, filing, and administrative fees
Title search fees (to prove you own the property, free and clear)
Prepayment penalty fees
NSF, late or missed payment fees
Get up to speed on what your lender may be charging you well before signing off on your HELOC.
What are the Risks of Taking out a HELOC?
Homeowners need to think carefully before deciding to shoulder more debt. If you’re thinking of taking out a HELOC, here are the red flags to watch for:
You’ve used your home as collateral. If you miss payments and default on your loan, you run the risk of losing your property. This is the biggest red flag to consider.
Your lender may reduce or freeze your line of credit. If you make late payments or your home’s assessed value takes a dip, your lender may freeze your account. This is a caveat worth paying attention to, especially if you’re relying on your HELOC to pay for key expenses.
Your fluctuating interest rate may tamper with your budget. If your monthly budget is already stretched thin, an increase in interest rates – and, in turn, a higher monthly payment, may put you in a precarious situation.
You may end up spending more than you need to. HELOCs provide you with access to cash whenever you need. It can be tempting to turn to for discretionary spending, like splurging on new clothes, the latest iPhone, or a lavish vacation.