Acronym for Home Equity Line of Credit, the HELOC is a revolving line of credit that serves as a backup source of funds in case you were to lose your job. You can also use these funds for any other expenses you may incur such as higher education for yourself or a child, renovating your property, or debt consolidation. Here’s everything you need to know:
- HELOC allows you to borrow against the equity you’ve collected on your house by making regular payments. However, do keep in mind that you can only borrow up to 65% of the equity. In other words, if your house is worth $1,000,000, and you’ve paid off 50% or $50,000, you can borrow up to 65% of the $50,000 or $32,500.
- If your property appreciates in value, you can qualify for a higher credit on the equity.
- Interest rates are lower than the typical lines of credit and you can borrow funds as and when you need them.
- You’ll need to pay interest only on the amount you’ve borrowed.
- Interest varies according to the Prime Rate on any given day and your lender fixes the rate of interest +/- the Prime rate. Typically, interest rates are higher than the variable mortgage rates. The rate may also depend on your credit score.
- You can borrow any sum of funds you need without having to go through a new loan application procedure each time.
- Most lenders don’t levy a penalty on mortgage prepayment.
- Before approving your HELOC, the lender is likely to assess your credit score to check if you can pay back the loan.
- Your lender will assess your house for its equity value and the status of the mortgage on it. You’ll also have to submit proof of ownership of the property.
- In case you’ve taken out a second mortgage on the property in the past, the lender will want to check your repayment records.
- Most providers ask if you have a steady job and source of income to prove that you can make payments. In case you’re self-employed with a variable, unreliable source of income, your lender might ask for some kind of assurance that you can honor payments.
The criteria for approving a HELOC is designed to safeguard the interests of both, the lender and borrower. The lender needs reassurance that the loan is secure and the borrower is protected from losing a house which is a major investment because of misdirected financial planning. It is advisable to borrow from a HELOC only if you have an emergency need of funds. Or, if you can deposit the funds in an investment avenue that is secure and offers you a higher rate of interest than what you pay for the HELOC.