HELOC

A home equity line of credit (HELOC) is a secondary mortgage that allows you to borrow money against the equity you have built up in your home. Oftentimes, a homeowner will take out a HELOC to help cover the costs of a remodel or renovation project, but there are no restrictions on how this money must be used. Instead of receiving a lump sum of money at one time, the line of credit is available to draw down from over a designated period.

The HELOC will have a draw period, where the borrower can take out money and a repayment period, in which the borrower must repay the loan. Usually the repayment period is longer than the length of the draw period. Interest is only added to the amount that you borrow, and it’s important to remember that it will accumulate during both the draw period and the payback period.

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Qualifying for a HELOC

In order to qualify for a home equity line of credit you must meet the following criteria:

  • Steady employment history – you will need to prove that you have had the same job for at least two years.
  • Your monthly debt payments cannot exceed more than 36% to 43% of your monthly income. This varies with each lender.
  • You will need to have at least 20% equity in your home before you can borrow money against it.
  • Most lenders will want to see that you have a credit score of 700 or higher before approving you.

Pros and Cons of a HELOC

There are several advantages with opening a HELOC. These loans are great for intermittent and short-term needs since you can opt to borrow varying amounts. For example, a person who wants to pay off a credit card or student loan that was a higher interest rate might look at a home equity line of credit as a good short-term solution.

There are risks involved as well. The primary risk with drawing down from a home equity line of credit is variable interest rates. With a HELOC, interest rates can increase or decrease on a daily basis, they are not limited to a specific term. These loans also usually don’t have a cap on how much the interest rate can increase during both the draw and payback period.

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When to Consider a HELOC

It’s best to consider opening a HELOC if you are confident that you can repay the amount you borrow before the payback period begins.