The financial industry needs more acronyms like Minnesota needs more snow.
Unfortunately, the banking sector is filled with arcane abbreviations that confuse non-bankers. HELOC is one them.
A Home Equity Line of Credit – or HELOC for short – is a line of credit you can borrow against the value in your home to finance home renovation projects or other expenses. Does a HELOC make sense for you? Depends. Here’s some info to consider.
HELOC 101
A HELOC is a revolving line of credit homeowners can use to finance whatever they choose. Maybe you’re looking to redo your kitchen or consolidate high-interest debt. How to spend the money is up to the borrower.
While a home equity loan is disbursed to borrowers in one lump sum, a HELOC is a line of credit that can be drawn from as needed. HELOC borrowers have a credit limit that determines how much they can spend and make monthly payments.
A HELOC is secured by your house, meaning that if you fail to make payments you risk foreclosure. Borrowers interested in a HELOC or home equity loan – also secured by your house – should be confident they can afford the monthly payment.
Why Apply for a HELOC?
There’s more than one reason you might opt for a HELOC.
It may be beneficial if you’d like to finance something that could increase the value of your house, like a remodeling project.
Some take out a HELOC to consolidate debt or take advantage of lower interest rates. However, borrowers shouldn’t apply for a HELOC if it will only add to an already large amount of debt. Keep in mind that a HELOC is a second mortgage and secured by your property. Again, all the more reason that you should be confident you can make the monthly payment.
It’s not a good idea to use a HELOC to finance vacations or other discretionary purchases. If you’re paying for “wants” with home equity, you’re likely living outside of your means.
How Much Can You Borrow?
The amount of money you can borrow through a HELOC depends on how much home equity you have, your credit score and other factors relating to your particular financial circumstances.
Home equity refers to the amount of your mortgage that’s paid off. In other words, it’s the value of your home minus what you still owe. For instance: If you have a $200,000 house and a $100,000 mortgage balance, you have built $100,000 in home equity. Generally, lenders will allow you to borrow up to 80-85% of your home equity. That means, based on the aforementioned example, you might be able to borrow around $80,000 through a HELOC.
A HELOC is a second mortgage. So you’ll need to have a strong credit score to get an attractive APR. You’ll also need to provide financial records to give a lender peace of mind you’ll be able to repay the loan.