Home Equity Line Of Credit (HELOC)
A home equity line of credit, also known as a HELOC, is a second mortgage option that enables homeowners to borrow against the equity in their homes in the form of a line of credit. This line of credit can be utilized for various purposes, such as home renovations, education expenses, and the consolidation of high-interest credit card debt.
In order to qualify for a HELOC, similar to a mortgage refinance, certain requirements must be met.
The specific qualifications for a HELOC may differ among lenders, but generally, the following criteria are necessary:
Good credit: A credit score above the mid-600s is typically sufficient for approval, although a score above 700 is considered ideal.
Adequate home equity: It is advisable to have at least 15% to 20% equity in your home.
Responsible payment history: Lenders may assess your past payment history to identify any instances of late payments.
Favorable debt-to-income ratio (DTI): A lower DTI is preferable. It is advisable to clarify your lender's required DTI ratio to determine your eligibility.
Stable income: Many lenders require proof of income to ensure your ability to make loan repayments.
4 Common Ways To Use A HELOC
HELOCs offer a versatile method for utilizing the equity in your home. The usage of funds is not restricted, allowing for various possibilities. Let's delve deeper into four common approaches to utilizing a HELOC.
Enhancing your Home or Conducting Repairs - When seeking to enhance your home and increase its value, tapping into the existing equity of your home through a HELOC can be a viable option.
Certain improvements hold more value than others. While a complete kitchen remodel may yield a one-to-one return on investment, even less extensive improvements can augment the overall value of your home. Finishing your basement or refreshing your home's interior with a new coat of paint can also contribute to its worth.
Consolidating Debt - If burdened with substantial high-interest debt, such as credit card debt, a HELOC can aid in consolidating all debts into a single, lower-interest loan. This consolidation has the potential to save you hundreds of dollars in interest.
Do bear in mind that by utilizing a HELOC to consolidate credit card debt, you are exchanging unsecured debt for debt secured by your home. Failure to meet the obligations of the HELOC may result in the loss of your home.
Settling Medical Bills - Medical expenses can quickly accumulate, costing thousands of dollars, even for basic procedures and care. With a HELOC, you might be able to settle your medical bills and make repayments on your line of credit at a lower interest rate, ultimately saving you money in the long term.
Financing Higher Education - Certain homeowners opt to utilize their home equity to fund their own or their children's college education. While this can be a viable choice in certain circumstances, exploring all available options is essential.
If you or your child qualify for federal student loans, you may obtain a lower interest rate compared to that of a HELOC. Furthermore, federal student loans provide additional benefits such as loan protections and flexible payment plans, which may be more advantageous.