Home Equity Line of Credit (HELOC)

As with any home equity loan, you will be able to borrow up to 100% of your current equity through a home equity line of credit (HELOC). However, this amount is not distributed to you as a lump sum. Instead, it provides an optional line of credit that you can use as needed. You can also repay it either within the month or through a payment plan. So it functions like a credit card. This type of loan is suitable for people with occasional extra expenses, or who wish to have an emergency line of credit available for unexpected expenses.

Here are some of the specific features of the HELOC:

• A home equity line of credit, like a home equity loan, requires a separate payment each month in addition to your mortgage payment.
• You are not required to withdraw money. You can use the line of credit only when you need to.
• You can repay whatever you have used at the end of the month if you wish. You also have the option to make only a minimum payment each month.
• Money from a home equity line of credit is normally accessed by writing checks or using a debit card.
• The interest rates are variable and can change at any time. Repayment plans may also change.
• You only pay interest on the money you actually use. And you don’t have to reapply every time you wish to use more money.
• As with home equity loans, lenders normally require a credit score of 680 or higher, and a loan to value ratio on the first and second mortgages of 80 to 90%. Credit scores above 720 obtain the best interest rates.
• A home-equity line of credit may be appropriate when there is a need for ongoing extra cash, such as with college tuition payments. For those who have an irregular income, it provides the flexibility to meet occasional needs.

What’s the Conclusion?

Refinancing into a larger mortgage, as occurs in cash-out refinancing, makes sense if you are seeking a lower overall rate of interest or a longer term. This option may also be available to more people, as lenders use less stringent guidelines for qualifying borrowers. A home equity loan or home equity line of credit is appropriate when you need quick cash, along with flexibility in the terms of use and repayment.