The Ins and Outs of a Home Equity Line of Credit
Home equity can be the biggest potential asset that most people have. Everyone knows that they can use their house to obtain access to funds when they sell their home, but not as many realize they might have the opportunity to access additional funds because of their house.
If you do not want to sell your home, but are looking for a way to have access to additional cash, a home equity line of credit may be the answer you are looking for.
How a HELOC Works
A home equity line of credit (aka HELOC or second mortgage) allows homeowners to obtain a secondary loan that uses their house as collateral. Lenders will allow homeowners to borrow against the equity that they have in their house to have access to needed cash.
These loans work similar to a credit card. You will be approved for a total loan limit based on the equity that you have in your home. You will then have access to the total amount that you were approved for, but you are not required to use it all. You are able to use only the amount of funds that you need and are able to take additional in the future.
Some lenders allow you to make interest only payments, while others require you to pay on the principal as well each month. The typical terms on HELOCs are 5 to 10 years.
How Much Will You Be Approved For?
When lenders look at approving you for a home equity line of credit they will need to determine the appraised value of the home. Then they subtract the balance of your mortgage or any other second mortgages from the total. Then you will be approved for 75% or 85% of that total.
For example: You have a mortgage balance of $225,000 on your house. You are working with a lender that uses 75% as the percentage they will allow you to borrow against the appraised value of your home. Your house just appraised for $340,000. 75% of $340,000 is $255,000. That means once you subtract your current mortgage of $225,000, you will be able to obtain a HELOC with a limit of $30,000.
Your lender will also check your credit and financials to make sure you are able to repay your HELOC along with your current mortgage.
What All HELOCs Have in Common
There are some things that all second mortgages will have in common regardless of what lender you are working with.
This includes the following:
You only pay interest on the amount of the loan that you are currently using. That means if your loan is for $30,000 but you are only using $10,000, you will only pay interest on the $10,000.
However, interest rates are usually adjustable, meaning the rate will not remain fixed and can increase or decrease throughout the life of your loan.
Like a credit card, your loan limit is revolving. That means once you make a payment on the principal of the loan, the funds become available for you to borrow again.
Home equity loans tend to offer lower interest rates than alternative loans. This is due to the fact that lenders are taking on less risk because the loan actually uses your home as collateral, meaning your lender has a good guarantee of repayment.
If you are need of cash for home improvements, college tuition or unexpected medical expenses, a home equity line of credit can be a good option. The interest rates can be the best option you will find and the flexibility of using only what you need at the time can save you in paying interest on money that is sitting in the bank.
If you are interested in obtaining a HELOC, start with your current lender and work from there.