A HELOC, or home equity line of credit, can be a valuable financial too for homeowners.
If you’ve just become a homeowner, you have many reasons to celebrate.
Owning your first home is an exciting rite of passage. This dream come true comes with its own set of responsibilities, as well as benefits.
One of these alleged benefits is the ability for qualified homeowners to borrow against the equity in their home. This can be accomplished through a home-equity loan or a home-equity line of credit.
While both options are popular among homeowners, let’s look specifically at the home-equity line of credit to see the benefits, and drawbacks, associated with it.
What is a Home Equity Line of Credit?
The home equity line of credit (HELOC) differs from the home equity loan in that instead of one lump sum of cash being distributed to the homeowner, a line of credit is established from which they can borrow.
Whereas a home-equity loan has a beginning and end with set payments in between, the HELOC offers more flexibility in the amount you borrow and in turn how much your monthly payments will be.
You can borrow from a HELOC on an ongoing basis and your payments reflect the amount of money you have borrowed. It is important for anyone considering a HELOC to understand the pros and cons of this type of loan.
- Instant access to high credit limits: If you have a lot of equity in your home, a HELOC will give you immediate access to a large amount of cash. This can facilitate home renovation projects, tuition payments or unexpected medical expenses.
- Lower interest rates: Compared to interest rates associated with credit cards and other types of personal loans, the HELOC usually offers a lower interest rate.
- Tax benefits: Considered a second mortgage, the HELOC offers tax benefits not associated with credit cards. Interest paid on a HELCO is tax-deductible.
- Repayment flexibility: Depending on your lender, you may have a great deal of flexibility in your repayment options. You may be able to opt for interest-only payments (not recommended) or turn the line of credit into a fixed-interest loan.
- Incurring Debt: No matter how you look at it, a HELOC is debt. Period. As such, you should proceed with caution. Using HELOC's as your emergency is especially dangerous.
- Loss of equity: When you borrow against your home, you lose that same amount of equity. This can be a disadvantage to those who have paid off their mortgage or those who want to sell their home in a down market. If the value of your home drops, your lender also reserves the right to freeze access to your line of credit.
- Adjustable interest rates: When interest rates are tied to the prime rate, you risk paying much more than you originally thought if there is a dramatic increase in the prime rate. With an adjustable interest rate, there are no guarantees on how much you will pay from one month to the next.
- Risk of foreclosure: Whenever you use your home as collateral for a loan, you risk losing your property should you fail to repay the HELOC as agreed. No one wants to think of the worst-case scenario; however, you should carefully consider if you are willing to risk your home if the unforeseen happens and you are unable to meet your financial obligations.
With the pros and cons of a HELOC in mind, you can decide whether or not this lending option is right for you. If your other debts are minimal and your financial habits are strong, you could really benefit from a HELOC. Read on to see how you can apply for a HELOC and learn where to get the best one.
How to Get a HELOC
Figure
If you’re interested in applying for a HELOC, check out Figure. This FinTech company is shaking up the lending scene.
Figure utilizes AI technology to provide homeowners with a quick efficient application process and the best home equity line of credit offers.
Figure was founded in January of 2018, and in its short lifespan it has made headlines for its exceptional customer service and reputation.
Figure uses an Automated Valuation Model to appraise your home’s worth, a comprehensive and quick assessment method. It also comes with a HELOC calculator and helpful resources to educate borrowers.
Check out the rates and features of Figure below.
How to Get Approved for a HELOC
If you’re wondering what HELOC requirements are, you’ll have to look to your lender for specifics. Generally speaking, though, you can expect some of the following requirements across the board:
- Equity: You’ll likely be required to have an appraisal to determine that you have between 15 and 20% equity in the home.
- Good credit: Your lender will likely require a credit score of 620 or higher.
- Strong debt to income ratio: Your DTI will most likely need to fall between about 43 and 50%.
- Payment history: In addition to your overall credit score, the lender will take a close look at your history of making payments on time.
Should You Get a HELOC?
For the financially savvy person, HELOCs can make a lot of sense. Unfortunately, a lot of people who I’ve encountered with HELOCs also carry a good size of other consumer debt which has them over leveraged.
For the person that has credit card debt and other consumer loans, a HELOC is not the ideal lending option. You may have trouble getting approved altogether, finding good rates, and making payments.
If, however, you do have strong credit, plenty of equity in your home, and a solid financial plan to see you through in case of the unexpected, a HELOC could be a handy tool for you.
Bottom Line
Borrowing money is a personal decision and one that should take into consideration your current financial situation, anticipated ability to repay, the purpose of the loan, and your risk tolerance.
If managed properly and all conditions in the market and economy remain favorable, the HELOC can be beneficial to borrowers.
Conversely, if the homeowner isn’t vigilant in managing the HELOC or changes in the market and economy create negative conditions, this second loan on your property could be the cause of additional financial stress.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
