When you need some extra money to make a big purchase, remodel your home, or pay the balance on a high-interest credit card, a HELOC (home equity line of credit) might be the perfect solution. A HELOC can reduce the stress involved with repairing sewer lines, redoing a leaky roof, or adding an extra bedroom for a new family member while continuing to add value to your home.
But how exactly does this line of credit work?
Borrowing against your home equity is a way of getting home improvement money as a second mortgage. It should be noted that a second mortgage doesn’t necessarily mean two different payments per month. Instead, borrowing against your home equity allows you to take a high-collateral loan in either a lump sum or a line of credit.
Consider the different types of loans as a pile of cash versus a credit card. Your lump sum will have a set interest rate and can immediately pay bills such as fixing a plumbing emergency. Your line of credit will have a maximum limit like a credit card and may change interest rates depending on when you withdraw that money — a great way of accomplishing multiple remodel projects such as a new deck and adding a sunroom.
A HELOC is secured by your home equity. Similar to a credit card this is an open-ended loan (variable amount up to the limit) that may be paid down or charged up for a set length of time.
While lines of credit are the most flexible option to add home improvements, there are also limitations. There will be a set time period to use this credit as well as a maximum amount of cash available. These determinations are made based on both your remaining mortgage payments and your current credit. You will generally want to demonstrate steady employment and a credit score of at least 620. In addition, you should own between 15% to 20% of your home equity, meaning you’ve been making payments for a while. Your lender will also look at your debt-to-income ratio.
In addition to restrictions based on your finances, most lenders will also want to evaluate your home. An appraisal is needed on your house to assess the home’s current market value. Your credit limit will be determined considering all of your financial information, in addition to a percentage of your home’s appraised market value, which is then subtracted from the balance owed on your present mortgage loan. Sudden changes in the market can also impact your line of credit, another difference between home equity loan and line of credit.
Looking for money to improve your home? We’d be thrilled to discuss our many mortgage solutions and explaining the difference between a home equity loan and line of credit! We can help simplify the process for you. Contact us today.