Many homeowners find themselves in tricky financial situations. These situations could potentially be solved with the use of a Home Equity Line of Credit, commonly referred to as a HELOC. Sometimes referred to as a “second mortgage”, A HELOC is a line of credit given through a bank. As a homeowner seeking financial assistance, you should consider the advantages home equity lines of credit can offer you. After all, you can obtain a HELOC by using the value of your home as collateral. The way homeowners use HELOCs resembles how they use ordinary credit cards. Now, you might be wondering what exactly is a HELOC? And is a HELOC the right option for your situation? Fear not, we are going to answer some of the most important questions about Home Equity Lines of Credit. Read this post to learn how a HELOC works.
What Is A HELOC?
Like a credit card, a HELOC is a revolving loan, allowing money to be withdrawn, paid off, and withdrawn again. Unlike a conventional credit card, however, a HELOC comes with a time frame in which you will have access to the money. In most cases, this time frame lasts around 5-10 years. Your monthly payments during this withdrawal time frame are only that of the interest against the loan, with the total sum of the loan to be paid off over a 10-20 year period in most cases. As opposed to a Home Equity Loan, which is given as a single lump sum, a HELOC allows you to withdraw only the money that you need, meaning potentially having less to pay back. Having access to a HELOC allows you to make large purchases or pay off existing debts that may have been incurred.
Is A HELOC Right For You?
Oftentimes, homeowners use the money they receive from a HELOC for smaller home repairs and renovations. Of course, you are not limited to reinvesting a HELOC into your home. The funds made accessible for you can be used for college tuition or larger purchases, say a car or even as a down payment for additional properties. But perhaps one of the wisest uses of a HELOC is to consolidate existing debt. Since many HELOCs have interest rates as low as 5% depending on the credit of the borrower, using the money to pay off higher interest debts will end up saving you money. That said, one certainly bad reason for taking out a HELOC is just to have money to be used on a day-to-day basis. If the funds received from a HELOC are needed to get by, then you may need to reevaluate your spending habits.
How Do I Apply For A HELOC?
You do not need a finance degree to understand how to apply for a HELOC. In the most simple of terms, to get a HELOC a homeowner will apply to a lender. In most cases, the lender is a bank. The lender will consider what the value is of the home in the current market. They will also assess any debt already outstanding against the property. Ordinarily, a bank will offer a line of credit against your home upwards of 80% of the property’s worth subtracted against any preexisting debt, say the remainder of your mortgage. So if your home is valued at $500,000, but you still have $200,000 remaining on the mortgage, the bank may extend a line of credit of $240,000. You need to comprehend this information in order to understand how a HELOC works.
What Information Do I Need?
During the HELOC application process, you should demonstrate your ability to pay back the line of credit. The lender will ask you to provide key information abouy your income, employment and tax status. Moreover, their underwriting department will analyze your existing debt and payments before taking the additional equity on your home. Similar to applying for a credit card, they may run hard credit checks to verify your financial status. To secure a home equity line of credit, prepare these essential documents for review. Keep these essentials in mind to understand how a HELOC works.
What Are The HELOC Interest Rates?
Homeowners always want to put themselves in a financial situation where reducing interest is possible. Like any other loan or line of credit, a HELOC has a variable interest rate that fluctuates based on the prime rate, or financial index. Typically, the rates fall between a minimum and maximum rate. Currently, the HELOC interest rate is 5.81% depending on the size of the credit line. Additionally, your credit score and documentation could give you access to lower rates. As the rates change, you can compare them with different lenders to get the best deal. However, you have to factor in any additional fees that may come with opening a HELOC for personal use.
These are some of the major questions about how to use a HELOC. You should be financially responsible when taking on debt. Consult a professional if this is the best decision for you. First, understand the basics of what is a HELOC? Then, determine if a HELOC is good for you financially. If so, apply for a home equity line of credit with the proper information and documentation. Finally, shop around for the best HELOC interest rates from lenders. By answering these questions, you can use a HELOC for your personal needs. At the same time, you will fully comprehend how a HELOC works.