Loans

Here’s Everything You Need To Know About HELOC

HELOCs are types of home equity loans that allow you to access funds as needed and pay them back at a variable interest rate. 

Because of this, HELOCs are typically best suited to people who are in need of funds for ongoing home improvements or who require an extension of time to pay back existing debts. Home equity loans and personal loans generally have higher interest rates than HELOCs; to get the best rates, however, you need a high credit score, a low debt-to-income ratio, and a lot of home equity.

What is the difference between Home Equity Loans and Home Equity Lines of Credit?

There are some differences between home equity loans and home equity lines of credit or HELOC mortgage. Be aware that both can lead to a foreclosure if your lender does not get paid back. 

You pay back a home equity loan with interest in a fixed amount of time. Home equity loans are similar to second mortgages. The interest rates for home equity loans are fixed, so they don’t fluctuate. You may also be able to claim them as a tax deduction, depending on what they are used for.

You can withdraw funds from a HELOC just as you would from a credit card. Your available balance is replenished as you pay the balance back. The draw period is the period where funds can be withdrawn, and the repayment period is the time when funds cannot be withdrawn.

Conditions for borrowing against home equity.

A sufficient amount of equity in your home is required before you can borrow against it. For instance, if your home is valued at $500,000, you need to have already paid down $100,000 of the price. You will be responsible for paying for an appraisal of your home, which will be done by the lender. 

In addition to your debt-to-income ratio, lenders also look at your gross monthly income divided by total monthly debt payments. 

In order to qualify for a loan, your debt to income ratio should be less than 36%, which means your monthly gross income should be less than your monthly debt. In some cases, lenders go higher than 50%. Credit histories are also taken into account. 

The minimum credit score required to be accepted will be 700; a credit score in the mid-600 range may also be accepted. Pay stubs, W2, and possibly your tax return may be used to prove you have income. 

Tips for unlocking your home’s equity.

Usually, home equity loans and home equity lines of credit are the two best ways to access home equity. Borrowers receive a sum of money at a fixed interest rate over a set period of time that’s repaid over time. 

In layman’s terms, a HELOC is a revolving credit line, which you can use, payback, and draw again for a long period of time, usually a decade. A period of flexible interest is typically followed by a period of fixed interest.

Third, you can refinance into a loan with a higher payment than you currently owe and pocket the difference in cash.

Generally, home equity loans have these standards, although every lender has its own requirements:

  • A home’s equity is determined by an appraisal and is usually at least 15% to 20% of the house’s value
  • A debt-to-income ratio of 43 to 50 percent may be possible
  • 620 or better credit score
  • Bills paid on time in the past

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