If you are looking for funds to pay for your education, medical bill, home improvements, down payment for buying new property, and you have good FICO score, you may consider taking out a home equity line of credit (HELOC).
A home equity line of credit is a loan in which the borrower uses his/her home serving as collateral to get some amount of credit from the lender. The HELOC doesn’t require the money to be used for a specific purpose.
How does the lender decide how much credit you are qualified for home equity line of credit? Many lenders set the amount of credit for home equity line by taking a percentage of your home’s appraised value, then subtracting the existing mortgage balance. Most of time, the percentage which is used for this purpose is 75%. For example, your home is appraised as $400,000; then 75% of it is $300,000; if you still have $200,000 on your mortgage balance, then the maximum credit you could get is $100,000.
Like all other loans, the lender will also check your FICO score, your income, debts or other financial obligations to decide your ability to repay the loan before approving the amount of home equity line of credit.
When you are applying the home equity line of credit from the lender, you will also make agreement with the lender how you pay back once you draw the credit. You could have option to make minimum payment like interest only, then you pay off all the principal at the end of term. You also could pay back all the credit you have drawn to avoid paying any more interest at any time.
Normally, the interest rate on a HELOC is variable, different from a conventional loan. And the interest rate is generally based on an index, such as the prime rate. The different lenders may add the different margin on top of the prime rate to come up the interest rate for HELOC. Since the prime rate is changing along the financial market, so is the interest rate for HELOC.
Like all other home loan, failure to repay the loan of meet the loan requirement may result in foreclosure since the home equity line of credit uses the home as collateral. So the lender will require and watch the borrower to maintain a certain level of equity in the home, and the lender could reduce or freeze your line of credit.
When you are applying the home equity line of credit, there might be some costs to establish and maintain a home equity line, like the fee for home appraisal, application fee and closing costs. You’d better shop around and talk to the potential lenders. Some of lenders may waive some of fees if the certain criteria are met.
Just keep in mind, the home equity line of credit is a loan. You have to repay the principal you draw, plus the interest. It adds another payment and burden to your monthly budget. So you need be careful when you draw the money out of it.