Your Guide to Securing a Home Equity Line of Credit
A family’s home is often their most valuable asset. If you’ve purchased a $300,000 home and only owe $200,000 on it, you’ve got a nice chunk of “equity,” or value, which can be utilized for whatever financial situation might arise in the future. One option to get your hands on this equity is to sell your house and keep the profit. Of course, that’s not usually the best option. A better option is to apply for a home equity line of credit, also called a “HELOC,” and to start using that equity for whatever you need!
What Is a HELOC?
To begin, let’s define a HELOC (pronounced “hee-lock). A HELOC is different from a conventional loan in that the funds are “available” to you much like the funds on a credit card are available to you. With a normal mortgage loan, you’re “given” the funds up front to purchase the home, which you begin paying back in monthly mortgage payments right away. With a HELOC, you will also have monthly payments due, but only based on the amount you’re utilizing at the time—just like a credit card.
The big difference between a HELOC and a credit card is that one is “secured” (the HELOC) and the other is “unsecured” (the credit card). This simply means that your HELOC is backed by the value of the house, thus making it a little easier to obtain. This also means that if you do not pay back the line of credit, the financial institution that provided the line can come after your home! In short, this ends up resulting in a foreclosure.
Your Home’s Value
Does being backed by the value of the home mean that it’s a guaranteed done deal and that you will be able to get the line of credit? Absolutely not! There are quite a few things that a lender will consider before approving an equity line, such as your current credit scores, your financial situation, and, of course, the overall value of the house.
Let’s focus on the value of the house. Typically, a mortgage lender does not want to lend more than 85% of the value of the home. Some lend 100% of the value (which has been a big part of the mortgage bubble issue). As a result, a lender will need to confirm not only the value of the home, but also your ability to repay the debt. The lending company will then decide on the amount it will consider for the HELOC, which may or may not be the entire amount of equity currently available in the house.
Additionally, the interest rate on the loan will need to be determined. Most will have a variable interest rate offering lower monthly payments on the front end, but this may increase over the life of the loan. This is something you will want to be sure you understand very clearly before signing on the dotted line. Finally, much like your original loan, you may also have upfront costs such as application fees, title fees, appraisal fees, and other related expenses. Be sure to take this into account when starting the process and ask your lender about all of the associated fees.
It will be important for you to do your research when selecting a lender. Ask your friends, ask your family, and be sure to make several calls to different institutions. You will want to try to avoid asking the obvious questions, which are, “How much is this going to cost me?” and “What are the rates?” We can tell you the answer to both will be “it all depends,” so you want to ask more all-encompassing questions, like, “What is your process?” “What information is necessary?” and “What programs are available?” You’ll also want to be sure the person with whom you’re speaking and with whom you may potentially work is well-informed, knowledgeable, and personable.
Once the process is complete and you have been approved, you can access your funds for whatever you see fit. Home improvements, medical bills, college tuition, vacations—they are yours to do with as you please! Just remember, though, you’ll have to start paying it back!
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