Home Equity Line of Credit – Things to Know

Banks are using the sudden drop in home buying to attract existing homeowners to buy home equity lines of credit or HELOCs. Homeowners, whose houses have been able to regain their value after the slump in real estate, will supposedly benefit from these HELOCs. But there are certain things that the banks are not informing the homeowners. If you are not completely aware of the terms and conditions and the various aspects of HELOCs you may end up being strapped into paying a huge amount in loans.

Continued low interest rates and increasing home values are bringing back home equity borrowing into popularity. Experienced and well informed borrowers are using HELOCs to fund their home improvement projects. HELOCs are a low cost source of funding. Because home equity rates are low (they are between 4% and 7.25%), their interests easily become tax deductible.  HELOCs may sound very tempting but you need to be extremely cautious when getting one. You could end up borrowing more than you had planned.

How HELOC works

A HELOC is something like a credit card. In it, you get a changing interest credit line till a certain limit. You can use this as much as you like. You will have to pay an interest for a ‘draw period’ which is usually up to 10 years. After the draw period is over, you will have to start repaying both the interest and the principal. You can borrow between $10,000 and $1 million depending on a number of factors. Your credit score, the amount owed in the first mortgage and the value of your home will determine the maximum limit of your borrowing.

Difficulties in 2016

Standing in 2016, being approved for a HELOC may prove to be quite difficult. Lenders now look for higher credit scores. According to a report by CoreLogic, in 2015, HELOC borrowers were required to have a credit score of around 774. The number has gone up by 30% since the last decade. Also, lenders are now not willing to lend too much. The present loan-to-value ratio is approximately 60%.

In simpler terms, if the value of your home is $200,000 and the amount owed in your mortgage is $95,000, the maximum amount of immediate draw as HELOC is $25,000. The amount will be automatically debited from your account every month starting within a month. HELOC sounds very attractive but everyone stumbles here. 

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