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How To Receive Home Equity Line Of Credit
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A HELOC allows you to get a loan, where you borrow money using your home’s equity as security. The equity of your home is its market value if it was sold, minus any outstanding mortgage balances. Thus, the higher the home’s market value and the lower the mortgage balance, the higher is your equity. Also, the higher the equity the more you will be able to borrow with a HELOC.
A HELOC allows you to get a loan, where you borrow money using your home’s equity as security. The equity of your home is its market value if it was sold, minus any outstanding mortgage balances. Thus, the higher the home’s market value and the lower the mortgage balance, the higher is your equity. Also, the higher the equity the more you will be able to borrow with a HELOC.
What Is a Home Equity Line Of Credit (HELOC)?
A HELOC is a special type of mortgage loan. It is a mortgage because it uses your home as security for the loan. It can be the primary mortgage if your home is fully paid for or a secondary mortgage if there is still an existing mortgage balance. The HELOC establishes a line of credit for you, based on the equity in your home. It is like a credit card – where your credit limit is based on the equity.
Most HELOCs have two time periods. There is the initial “draw” period, where you can use your credit line (usually with special checks or card), typically for the first 10 years. Then there is the “repayment” period, where the credit line is closed and you have to make monthly payments to repay the balance of what you borrowed against the credit line. This repayment period is typically for the next 20 years.
Qualifications and Requirements
To get a HELOC, first the borrower must be qualified. Such qualifications usually consist of the following:
– A credit score of 620 or higher, with a clean mortgage credit history.
– Your monthly debt payments should be no more than 40% of your monthly income.
– Be the legally documented owner of the home.
Then the home in question must meet lender requirements:
– The home’s equity must usually be at least 15% of the home’s market value.
– The credit line will usually be limited to no more than 80-85% of the home’s market value.
– The home must have a clean title – with no legal problems to impair the sale of the home or security of the HELOC mortgage.
Procedure
– Shop around for a HELOC lender that offers favorable interest rates and repayment terms.
– Know in advance what your home’s equity is, so you have an educated idea of how much you can borrow.
– Prepare and submit all the required documents, which will probably cover things like an existing mortgage, credit cards and income.
– Sign a legally required “disclosure statement”, that will discuss interest rates, amount of credit line, repayment terms and rules and other requirements.
– An official appraisal of your home may be required.
– Process is finished at a “closing”, after which the credit line becomes available – This can be days or weeks after your initial application.
Special Considerations
– You can also borrow against your home’s equity by getting a regular home equity loan instead of a HELOC, where you get the loan as cash upfront in a lump-sum. This can be better for you because the interest and payments are fixed, rather than variable as with a HELOC.
– If your income is shaky or you expect any other kind of financial problems, be careful because the lender can repossess your home if you can’t make the required payments. It might be better to use existing or new credit cards for your borrowing needs.
– Be careful of the HELOC’s terms – especially how much the interest rate will be and can be in the future. Also, be careful if the repayment terms involve a larger payment in the future – known as a “balloon payment”.
