Everyone seems to have that day when they need money that they don’t have lying around. Sometimes it’s an emergency situation, but sometimes it’s a desire to complete a home improvement project or further your education. And for those of us lucky enough to own a home, a home equity line of credit, or HELOC (pronounced Hee-Lock), is a great solution.
A HELOC is a loan secured by your home. Interest rates may vary, but after obtaining the loan, you are given access to a sizable amount of cash typically up to about 85% of the value of your home. You would have to consider the amounts of other mortgages on your home to figure out the amount that would be available for a HELOC. HELOCs typically have two periods: draw and repayment. The draw period can last anywhere from 5 to 10 years, depending on the lender. During this time, you may borrow from the HELOC. Some banks will allow you to borrow while only paying interest on the amount that you borrow; other banks may require a combination of interest and principal payment. It’s best to contact your lender to determine what options are available to you.
Once the draw period is over, the repayment period starts and can last anywhere from 10 to 20 years. In this time the entire loan will be paid off.
There’s rarely a perfect HELOC candidate, but there are a few things that can help you if you’re seeking a home equity line of credit. Lenders are typically looking for a substantial amount of equity in your home along with a decent credit score. Typically borrowers have a minimum credit score of between 600 and 680. Generally, it also helps to have a debt to income ratio that is lower than 40 percent. (To figure your debt to income ratio, add up your monthly debt payments and divide by your gross monthly income.)
Whether you’re making some home improvements, paying medical expenses or seeking to further your education, a HELOC can be an excellent way to borrow money.