Benefits of a HELOC

If you have ongoing needs for money, such as home remodeling that will take some time or irregular income you want to supplement, a HELOC will most likely be better for your situation than an equity loan. There are many advantages to choosing a home equity line of credit:

• You will only pay interest on the money you withdraw
• You can pay down your loan and then borrow more
• You can draw money from your credit line as it is needed
• All interest you pay is tax deductible
• Interest rates tend to be low for HELOCs

HELOCs are a popular way for homeowners to consolidate credit card or medical debt, take care of home improvement projects or remodeling, or even pay for college. You can expect the interest rate you receive to be higher than rates for first mortgages, but much lower than rates for credit cards or even personal loans. While you can save a substantial amount of money by consolidating debt with a HELOC, keep in mind that this is a secured loan. Your house will be the collateral and you risk foreclosure if you default.

Qualifying for a HELOC

There are several requirements that you must meet to be eligible for a home equity line of credit:

• You must have equity in your home, although the amount you need depends on the lender. Some lenders allow you to get a line of credit of up to 125% of the equity you have, but most lenders will allow you to borrow around 80% of your equity.
• You must get a home appraisal to determine how much equity you have.
• Your monthly housing costs (which includes your monthly mortgage payment and HELOC payment) cannot exceed 28% of your before tax monthly income.
• Your monthly debts should not exceed 36% of your gross income.
• You must have steady employment for at least 2 years.
• You must have good credit. The minimum credit score depends on the lender, but it may be anywhere from 640 to 720.