Death in the family, illness, loss of a job, or divorce can take a great toll on our daily lives and finances. If tragedy strikes and you are unable to afford your monthly mortgage payments and find yourself falling behind, you may be able to modify your home loan to catch up and avoid foreclosure.
What Is Home Equity Line Of Credit & Will It Benefit Me?
If you need money to fund a home improvement project or have experienced an expensive medical emergency, you may have heard other homeowners talk about taking out a home equity line of credit. But what is it and how would it help you, if at all?
HELOC Acts Much Like A Credit Card
A home equity line of credit (HELOC) is a type of loan that essentially “turns your home into cash”. That amount you borrow can be accessed at any time via a card your lender will issue you.
HELOC acts like a credit card in that it is considered a revolving loan and you can borrow any amount up to your loan limit for a certain period of time, paying it off like you would a credit card. Typically 5-10 years. When that time period is over, whatever balance you have not paid back by then is due. Some HELOCs have a 10-20 year repayment period, so triple check the terms before you apply for a HELOC.
When Would I Get A Home Equity Line Of Credit?
This type of credit is usually taken out when a homeowner wishes to make major repairs or improvements to the home to raise its value, especially if the owner did not save enough money for a home repair fund.
You Must Have Good Credit & Enough Home Equity
To qualify for a HELOC, you must have a credit score of at least 620 and a home value of at least 10% more than what you owe.
For example, if your home’s current value is $140,000, you have a good credit score of at least 620, and you have an outstanding balance of your mortgage of $100,000, you are eligible to borrow about $12,000.
So before you can think about taking out a home equity line of credit, you will need to spend some time building your home equity first.
Home Equity Lines Of Credit Aren’t For Everyone
It is essential to understand if a home equity line of credit will benefit you, as they are not for everyone. You should avoid this “second mortgage” if:
- You have an unstable income
- You cannot afford the costs you will have to pay up-front
- You need it for basic needs like groceries and other expenses
- You cannot afford the interest increase
- You aren’t borrowing a lot of money to begin with
Before you take out a home equity line of credit, speak to your lender and financial adviser. They will guide you through your finances and advise you as to the best course of action. If a HELOC is not right for you, they will recommend another solution.