HELOC – What Is It, And How Does It Work?

Home equity lines of credit are the solution many homeowners need. You can use your home equity for other purposes, such as home improvements or debt payoff by taking outa. Home equity line of credit.

HELOCs typically have more competitive interest rates than home equity or personal loans, helping homeowners achieve their financial goals.

What is HELOC?

A HELOC is a second mortgage on a property. When you borrow one, you leave your first mortgage untouched and tap into the home's equity with a second mortgage.

A HELOC works similarly to a credit card but has a limited draw period. During the first ten years, you can draw from the line as you need. Your minimum required payments are interest only on the funds withdrawn, not the entire line. Like a credit card, you can pay back the principal and reuse the funds during this time.

After the 10-year draw period, the loan goes into the repayment period. This is when your minimum payment consists of principal and interest to repay the amount borrowed, and you can no longer draw from it.

Who Benefits from a HELOC?

HELOCs have a variable interest rate, so they are best for homeowners with an ongoing need for funds. Common examples include borrowers renovating their homes or anyone trying to pay their debt off slowly without getting in over their heads.

HELOCs also work great as an emergency fund or a line of credit to have just in case something happens. Since the equity in your home isn't immediately liquid, many homeowners take out the line so that it's available should they need it, but they don't have to make payments on it if they don't use it.

How to Qualify for a HELOC

To get the most competitive rates on a HELOC, borrowers need great credit and a low debt-to-income ratio.

Before you apply, check your credit and fix any issues that bring your score down, such as late payments or collections. Also, check your credit for accuracy as mistakes often occur that the credit bureaus must fix if you dispute them.

Also, determine how much debt you have compared to your monthly income. Using the HELOC to pay down your debt will decrease your DTI, but try minimizing your debt before applying.

Finally, you need plenty of tappable home equity. You must leave 20% of your home's equity untouched but can access the rest with a HELOC. The more equity you leave in the home, the lower the rates you'll get.

Final Thoughts

HELOCs are a great way to use your home's equity the way you want. You can take the line of credit and never touch it, or take it and use it as much as needed.

The key is to perfect your qualifying factors to get the lowest interest rate and get as much of your home's equity as you need.