What are Home Equity Lines of Credit?
- June 3, 2019
- 3 min read
- 50 reads
There seems to be a lot of ambiguity behind home equity lines of credit, home equity loans, and a lot of other personal finance concepts behind consumer lending. You may have had a banker or guarantor explain some of these concepts to you thoroughly but feel like it missed the mark or the depth of explanation for your current situation.
Now more than ever, consumers have personally taken it upon themselves to seek this information out for themselves, only because we as consumers, thanks to the advent of technology, have become more keen to the idea that there isn’t much of a “legacy of knowledge” anymore; meaning that knowledge has become widely available at your fingertips, and capitalism rewards those that investigate.
By no means is there any blame to go around, because in such a great market we’ve experienced as of lately, bankers and financial intuitions are willing to cooperate more than ever, and as long as you do your own due diligence this means one thing for you, your family, and your dreams, this means this- the more you investigate the more you can gain leverage to have fewer fees from banks and creditors.
This brings up one subject, in particular, we will be discussing today and that is the idea of Home Equity Lines of Credit.
What is a Home Equity Line of Credit? (HELOC)
Put very simply, a HELOC is a line of credit secured by your home provided by various lenders that give you access to a credit line to use for larger expenses or to consolidate higher-interest rate debt on other loans like your credit cards!
HELOCs typically have lower interest rates than some other common types of loans and interest also may be tax deductible, but its recommended to consult your tax advisor regarding your interest in this rule.
How do You Qualify for a Home Equity Line of Credit?
Typical HELOC loans are factored up to taking 85% of the value of your home and subtracting the amount you owe to from your credit line. That means if your home is worth a hypothetical $100,000 and you owe $20,000 that means you might be able to get a credit line as high as $65,000 since you subtracted the amount owed from the $85,000 (85%) evaluation.
Of course, normal lending factor pattern based variables are accounted for, meaning your employment history, monthly income, monthly debt, current credit score/history, etc…
What Can I Use my Home Equity Line of Credit On?
Typical usage of a Home Equity Line of Credit is used to improve your home. Sometimes once you purchase a home, you’re well aware of projects to be completed or improvements to be made. While not all upgrades to your home increase your home’s value, your credit line can be used to help add additional living space, improve an outdated kitchen or bathroom, and or help with utilities in general.
Although, there are home improvement loans you may be interested in looking into if you can’t qualify for a high enough line of credit from a HELOC just yet.
When the upside outweighs the downside, running renovations with your line of credit very well may be an intelligent investment decision. For example, some real estate in recognized areas like San Francisco can see upwards of $60,000 higher evaluations simply for adding on a garage to the property.
Another common way people use their Home Equity Line of Credit is, it can help consolidate debt by helping you simplify your payments into one neat payment with a lower interest rate, since your debt, again, has been secured by the value of your own home.
Who Provides HELOC?
Generally speaking, most mortgage lenders will provide HELOC’s at different rates and percentages of the value of the home. If you’re in good financial health it is advisable to have lenders compete over your business.
For example, say bank A offers you a line at 5.5% maybe you could go to bank B and get the same terms for 5%, then go to bank C and get the offer for 4.85% and first 6 billing cycles at 3.25%. When you come from the mindset of “interviewing banks” opposed to entering the deal as someone who “needed that loan yesterday”, you’ll find that banks will in fact not “sell you” on their deals, but consult you competitively into a deal that is best for you.