What?s A Home Equity Line Of Credit?
?A line of credit that is similar to having a credit card but that is secured by your home and gives you a revolving credit line with a set maximum amount is what a home equity line of credit is, also known as a HELOC. Because home equity line of credit interest rates are generally lower than most typical loans, you can use it for whatever you want, but most wise people use it to consolidate higher-interest rate debt on other loans such as credit cards or for large expenses.
A person can get a substantial windfall if they sell their home for a profit. But that gain is locked up and out of reach while the person is living in the house and it is not for sale ? unless of course, that person accesses the equity of that home of hers/his with either a home equity line of credit, known as a HELOC or with a home equity loan.
These two variants of second mortgages are derived from that home?s equity: the amount of the first mortgage owed is subtracted from the home’s market value. Weighing the pros and cons of each is what will help the person decide which is the right one for her/him.
?Start New Financial provides you with all the answers to your questions about your debt, credit, finances, and mortgage ? to help you become debt-free and you can maintain your peace of mind.
Learn how to accurately calculate your home equity
The home equity line of credit calculator system or method that you must use to calculate your home equity is the following: When you take your property?s value and subtract from it the amount of money you owe on your mortgage, that?s how you find out how much equity you?ve built up in your home. Lenders may let you borrow as much as 85% of your home equity, depending on your financial track record. If you default on your payments, though, the lender can foreclose on your property since you?re using your home for collateral, so it is extremely important that you keep this in mind.
?The owed amount on outstanding home loans divided by the market value of the home is considered the combined loan-to-value ratio. Lenders will hesitate to let you borrow more against the home?s value if that ratio is high.
To put this into perspective, let?s say the home is worth $600,000 and $300,000 is owed. If you divide 300,000 by 600,000 you get 0.50, which means you have a 50% loan-to-value ratio. A 30% home equity line of credit? or loan of $180,000 would be granted to you by a lender that allows a combined loan-to-value ratio of 80%. The best home equity line of credit is obtained when the person has good credit and no mortgage.
A HOME EQUITY LINE OF CREDIT IS ANOTHER DEBT CONSOLIDATION PROGRAM
Using your home as collateral in a manner as if your home were a credit card is exactly what a home equity line of credit (HELOC) is. As mentioned, it allows you to borrow up to 85% of the value of your home minus the balance of the mortgage. Also, just as when you first got your mortgage, a lender may look at your credit score and history, employment history, monthly income and monthly debts. You are given a draw period in your home equity line of credit that is typically from five to twenty-five years, during which time you can borrow the allotted set amount of funds from this line of credit. Much like a credit card, the amount of available credit is replenished as you repay your outstanding balance on it. This means you can borrow against it all over again if you need to, and you can borrow as much or as little as you need throughout your draw period. You just make minimum payments only on whatever amount you actually use/spend on your available credit during that time, not on the complete amount that was approved and made available to you if you don?t use it all.To put this into perspective, if you only spend $17,000 of $75,000 made available to you in your home equity line of credit (because $75,000 is what your home equity line of credit was approved for), then you just make minimum payments on the $17,000.00 that was all you only used. It gives you a revolving credit line for use to consolidate higher-interest rate debt on other loans or for large expenses such as credit cards and is secured by your home. The interest may be tax deductible on a HELOC and it often has a lower interest rate than some other common types of loans. As tax rules may have changed, it is good to consult your tax advisor regarding interest deductibility. The repayment period begins (typically 20 years) at the end of the draw period.
Some of the advantages of choosing a debt consolidation with a home equity line of credit are that you can use a home equity line of credit to start a business, finance education, and pay for home improvements and medical bills, etc.?
Using a home equity line of credit to refinance credit card debt and get rid of bad debt may not be your best option because you would take unsecured credit card debt and secure it with your home.
Home Equity Lines of Credit
As you know, besides a HELOC, you can also take out a home equity loan on your home as well. That is why the common denominator between home equity loans and home equity lines of credit (HELOCs) is that you?re borrowing against your home equity. However, a loan generally gives you a lump sum of money all at once, while a HELOC is similar to a credit card: You have a certain amount of money available to borrow and pay back, but as you need it you can take what you need. The drawn amount is all you?ll pay interest on.
The interest rate on HELOCs is adjustable, or variable, which means it falls or rises according to the movements of a benchmark, though they often begin with a lower interest rate than home equity loans. This means that your monthly payment can also fall or rise.
A portion of what you owe on your HELOC is allowed by many lenders to be carved out by you and converted to a fixed rate. The balance of your line of credit will still be available for you to draw from at a variable rate.
The Advantages and Disadvantages of Home Equity Lines of Credit
Pro😕 During the draw period, home equity lines of credit may offer the flexibility of interest-only payments and you only pay interest compounded just on the amount you draw, not the total equity available in your credit line.
Con😕 Your payment can increase by rising interest rates and, if you lack the necessary discipline, you can find yourself saddled with large interest and principal payments during the repayment period because you might tap out the equity in your home by recklessly overspending needlessly.
The characteristics and terms of home equity loans and lines of credit tend to vary from one lender to another. Before you sign on the dotted line, never be afraid to shop around first. And before you do commit to a lender, be absolutely certain you understand the repayment terms of your loan.
IT?S NOT ALWAYS A GOOD IDEA TO GET A HOME EQUITY LINE OF CREDIT
TO GET RID OF BAD DEBT
WHAT WE SUGGEST
Speak to our ready experts who would love to help you understand the best option. Ready experts will give you a free consultation and in depth review of your available options. Also advise you of other means besides borrowing a home equity line of credit and help you exercise?alternative options.
Comparing HELOCs with Home Equity Loans
Which do you believe works better for you?
The first thing you must do, before deciding whether to apply for a HELOC or a home equity loan, is to calculate how much money you really need and how you plan to use it. As you weigh your options, don?t neglect to account for fees, interest rates,? tax advantages, and monthly payments.
It can be a powerful financial benefit for you to use the equity in your home before selling. Always be sure to remember that you’re using your home as collateral. Whether you choose a home equity line of credit or a loan, you have to avoid the following risk: With what may eventually amount to a long-term loan, you must resist funding short-term needs.
The requirements for HELOCs include:
- At least 20% equity remaining in your home
- A minimum credit score of around 620
- Upfront payment of an appraisal fee, application fee, and title fee.?
In addition, HELOCs feature variable interest rates that are based on an underlying benchmark interest rate that fluctuates over time. It?s doubtful that a HELOC is a wise option if your income is unstable or you believe it may become lower at any point during your loan, as this may lead to the risk of foreclosure.
Learn more about how HELOCs work
Option for Fixed Interest Rate
A portion of the outstanding variable-rate balance on your HELOC is allowed to be converted to a fixed rate by an option offered by some lenders such as Bank of America. You can be protected from rising interest rates when you?re making payments on a balance at a fixed interest rate that is stable and predictable.
Variable Interest Rate
The rate can change from month to month if you have a variable interest rate on your home equity line of credit. The variable rate is calculated from both a margin and an index
A component of a variable interest rate is an index. It is a financial indicator used by banks to set rates on many consumer loan products. For HELOCs, the U.S. Prime Rate as published in The Wall Street Journal, is what most banks like Bank of America use as the index. The index, and consequently the HELOC interest rate, can move up or down. A margin is added to the index and is constant throughout the life of the line of credit.?
You?ll receive monthly bills with minimum payments that include interest and principal as you withdraw money from your HELOC. Based on your balance and interest rate fluctuations, payments may change just as they may also change if you make additional principal payments. You can reduce your overall debt more quickly and save on the interest you?re charged when you make additional principal payments when you can.
HELOCs are the ideal resource for those who need money over a staggered period
When designing your individualized get-out-of-debt plan, we weigh your available debt relief options against all the factors of your personal financial situation to choose the best one for you. We truly care about good families having to suffer due to burdensome debt.
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