Our homes are our greatest asset, and in a money crisis they could bring the much needed relief. A home equity line of credit, also known as HELOC, can put money in your pocket.
A HELOC is a second mortgage that allows you to borrow up to a certain amount against your home equity based on the value of the home and the amount you still owe for the primary mortgage.
A variety of lenders issue home lines, and each bank has different criteria, fees, and repayment options. Here are some basic facts about these loans to help you decide whether a HELOC is a good idea.
Reasons to take out a home equity line of credit
The main purpose of a HELOC is to increase the value of your home with the money.
"Ideally, you should use it to remodel your house. So it is an opportunity to buy a house, lend it against this house, remodel it, and make it yours," said Mary Bell Carlson, CFP and AFC. known as Chief Financial Mom. "Now they're getting used to everything under the sun."
Because of historically low interest rates, according to Carlson, many people use HELOCs to pay off high-interest credit card debt. Interest rates for most equity lines are much lower than most credit cards, according to introductory offers. However, it is important to note that interest rates for HELOCs can often adjust and increase during the term of the loan.
During the COVID-19 crisis, people look for money in their homes to pay bills when they lose income.
"Most likely, this is one of the cheapest loan techniques you can currently get," says Carlson.
But she has a warning: “If you take money (out of equity) and borrow it for any reason – be it to actually renovate your home or to pay off credit card debt or for an emergency fund in times of crisis – you are now taking an unsecured debt and secure it now. "
This means that if you don't pay, your home is at risk of foreclosure.
"If you don't pay your equity provider, they can absolutely come and take your house," she said. "There are teeth on their bite where they just annoy you with debt collectors."
Get a home equity line of credit
Despite the risk, a loan with lower interest rates against your home equity can be a way to deal with this current financial crisis.
The amount you can borrow depends on the current value of your home, how much you owe on your current mortgage Debt to income ratio, Your Credit scoreand other criteria depending on the lender.
Just because you paid a mortgage does not mean that you have built up equity. Justice is the difference between what your home is worth and what you owe. It builds up over time when you repay your mortgage.
"If you are someone who has reduced zero or 1% or 2% and recently bought your house, you cannot take out loans," says Carlson. An interest-free loan could also mean a lack of equity, since you repaid not just the principal but just the interest, she added.
Is a HELOC a good idea?
Carlson has some advice when he thinks of a HELOC.
- Consider the fees and costs: You will most likely need a rating to determine the current value of your home, and you may also need a title search. These cost money, and there are additional fees that banks charge.
- Shopping spree: You don't have to use the company that holds your first mortgage for the HELOC. Different banks offer different interest rates. So do your homework and find the best.
- Know Your Debt Income Ratio: Take a look at your net income and make sure you have the money to have both mortgages and enough to cover the cost of living.
- Longevity: Think how long you want to stay in your house. The money from a HELOC must be paid back before the house is sold. So if you want to move in the near future, it may not make sense to borrow against equity.
"Home equity lines of credit can be a very inexpensive alternative to borrowing when needed," says Carlson. "So if you have no savings or reserve funds and are in need during this economic downturn and crisis, this can be a suitable lending technique."
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