HELOC stands for home equity line of credit, and it allows you to borrow money against the value of your home.
Similar to a credit card, a HELOC is a revolving line of credit. But unlike a credit card, a HELOC is used for big purchases like home renovations, college tuition, unexpected large expenses, or just to establish an emergency fund.
How do I qualify for a HELOC?
Qualification standards vary by lender, but many lenders require a credit score 680 or higher and a debt-to-income ratio below 40%.
Most HELOC lenders will let you borrow up to 85% of your equity, which is the value of your home minus the amount you still owe on your mortgage.
For example, say your home is worth $500,000 with a remaining first mortgage balance of $350,000. Multiply your home’s value by 85%, which gives you $425,000. Then subtract your existing mortgage balance ($350,000). That gives you $75,000, which would be your maximum HELOC.
How does a HELOC work?
During what’s called the draw period, which is usually about 10 years, you can withdraw money and pay back only the interest. Paying down the principal (the amount you borrowed) at this time is optional.
Then over the next 20 years or so (timeframes can vary for different loans), which is called the repayment period, you can no longer withdraw money, and you’ll pay back the amount you owe plus interest until you repay the amount you borrowed.
Much like when you apply for a mortgage, your interest rate will depend on your credit score, debt-to-income ratio, the amount you want to borrow, plus your equity. The interest rate for a HELOCs is often variable, meaning the rate can change over time. But in some cases it can be fixed, which means it remains the same throughout the life of the account. Be sure to research all the options available to you.
How do I access HELOC funds?
You might access your HELOC money with an ATM card, via online banking transfer, or you might receive checks that you can write against the account.
Remember that a home equity line of credit is different from a home equity loan. A HELOC is a revolving line of credit that you can draw from when needed, while a home equity loan is a lump sum that you borrow all at once and pay off with interest over time.
A HELOC can be a way to build more wealth by increasing the value of your home with upgrades or renovations. A HELOC can also have advantages over other forms of credit. The costs and interest rates can be lower, and sometimes they are even tax deductible. Be sure to compare several HELOC rates so you can be sure to get the best offer available.
Sources: Nerdwallet, Zillow,
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