Home ownership comes with a list of benefits which includes access to a home equity line of credit (also known as a HELOC). Other rewards to owning a home versus renting include financial perks, like healthy tax credits in some locations. For millions of people, the pride of owning their own home is incentive enough to buy. Whatever the reason, it is wise to know there’s a way to reap the benefits of a HELOC if the need arises.
Worldwide, homeowners have enjoyed what a home equity line of credit affords them. In this article, the following topics will be covered:
The money that is lent to buy a home (a mortgage) is a form of secured credit, which means property is put up for collateral. A home can be taken away (foreclosed) if the mortgage payments are not met. The same as a car; nonpayment means the car is subject to repossession.
The good thing about secured credit is that the borrower owns the property (home, car) after it is paid in full, unless he choses to sell it before then. With a home, the time between the first mortgage payment and full ownership of a home is when equity builds.
It its basic form, home equity means that for each month a payment is made, the mortgage amount goes down, so the homeowner “owns”, so to speak, the value of the gap between what is owed and what he’s paid. For instance:
A homeowner is approved for a mortgage in the amount of $100,000. He is required to make a down payment of $10,000. Assuming his monthly payment is $200, his home equity will build as follows:
This is a fictitious example used to show how home equity works. This demonstration does not include interest, insurance, fees, home value and a number of other factors involved with a real mortgage, all of which effect the bottom line amount of equity in any given month. The point is that, in theory, he can ask for a home equity loan or a home equity line of credit for $200. The difference between the two is outlined below.
A HELOC and a Home Equity loan are mostly based on the amount of equity left in the home. They are similar in that the amount borrowed is set by the lender and sometimes does not exceed the equity. But there are two major differences.
The majority of homeowners use a home equity line of credit to make improvements on their homes. This line of credit allows them to purchase items like appliances, window treatments, floor covering, and construction materials. This purpose makes sense because improvements beautify a home and add to its value. Others use their home for luxuries such as exotic vacations and new cars.
Other uses for home improvement loans include:
According to some financial experts, homeowners tend to use a home equity line of credit for their needs far more than for their wants.
Where to Apply for a Home Equity Line of Credit
The first instinct for homeowners is to go to the lender that holds their mortgage for a home equity line of credit. It does make sense because there is an established financial relationship in place already. Often, the search for a lender can end with the primary mortgage holder.
However, there are three primary reasons to compare other financial institutions:
In the search for home equity lines of credit, homeowners should also get direct answers concerning any prepayment penalties or charges for inactivity. Some lenders offer HELOC’s with what is called a maximum interest rate cap. This is beneficial because it can save money by stopping interest from rising for a specific time period.
Getting approved for a home equity line of credit is possible but not always a slam dunk. Of course, the first qualification is that the borrower owns his or her home with payments in good standing. Banks are careful to follow mortgage rules for this type of credit, which can sometimes be strict.
Overall, a HELOC will most likely be approved for someone with a lot of equity in the home which has been building over a period of time. The homeowner in the example earlier in this article would not be approved for it with the $200 equity he has following his first mortgage payment.
Like all credit, approval is based on other issues such as income and credit score. A HELOC approval also factors in homeowner-related bills, like homeowner association fees, when considering whether a borrower is eligible.
A home equity line of credit is a flexible and convenient way to use equity to meet the needs and wants of homeowners. It is often preferred over a home equity loan because repayment can be drawn out over a longer period of time and other reasons.
Homeowners should keep these tips in mind when considering applying for an equity line of credit:
The are several advantages to having a home equity line of credit to take care of emergency needs, or fund other endeavours in life. When used properly, a HELOC is a financially sensible way to achieve certain goals or make a home a better place to live. However, tapping into a home’s value should be taken with the same seriousness as when financing its original purchase.