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How Does A Home Equity Line Of Credit Work

how does Home Equity Line Of Credit works

In today’s article, we will be discussing how does a home equity line of credit works, we will also be talking about the requirements needed for a home equity line of credit, how to get a home equity line of credit, and the disadvantages they also have, we will also be talking about other things that will make you understand how they work.

Firstly we need to understand the meaning of a home equity line of credit and how it works, so we can understand what we use it for and why we purchase it.

What Is a Home Equity Line Of Credit

Home equity line of credit which is usually known as (HELOC) is another type of secured loan that enables you to have access to cash which will be based on the value of your house, there will be an agreement between the lender and the company, the period of time that will be given to the lender to pay back and collateral will be involved which might be the lender property which is the house.

HELOCs is known because of their flexibility in both repayment and borrowing money from customers, they are also known as the second mortgage in the industry and their interest rate is attractive and low, HELOC only deals with the home as their collateral.


How Does Home Equity Line Of Credit Work

You need to know how loan works before applying for it, firstly you have to meet up with their requirement first before thinking about applying because failure to meet up with the requirements can lead to other things.

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Home equity line of credit can allow you to borrow money to fix your building, education, medical bills, and so on, with an interest rate on the money given and you will be given a period of time to back and fail to pay back within that period of time your home may be taken from you because your home will be as a collateral when you are given the money. There are ways you can access this account to borrow money, you can have access to it through online transfer, cheque, and also with your card on point sales or at ATM. The baseline interest rate usually goes up and comes down because most of them are adjustable.

Set your rate by starting with an index rate and then add your margin which will depend on your credit profile that will be shown, normally the higher your credit score is the lower your markup will be, markup which is also your margin. The length of the draw period can be different from each other but it is usually 10 years, And the repayment period is often 20 years.


Home Equity Line Of Credit Requirements

You need to know the requirement needed for HELOC before obtaining the loan, here are the requirements that you need to know and meet up with;

  • The lender needs to know that most HELOCs require them to accept a variable interest rate because the rate can go up or come down, they do not have a fixed interest rate.
  • The minimum credit score for HELOC is 620 and they can also accept higher scores than the minimum score.
  • Lender home value should be more valued than what you owe, i.e your asset should be at least 15% more than what you are owing.
  • Your debt-to-income ratio should be under 43% or lesser, Note that the lesser your debt-to-income ratio, the easier it can be for you to be qualified for HELOC.
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How To Apply For HELOC

Here are the things you have to do to get a home equity line of credit, it is similar to the process of purchasing a mortgage;

  • Know if you have sufficient equity by using the HELOC calculator to calculate.
  • Once you know the amount you want to borrow, go ahead to look for HELOC lenders
  • Make sure you put all the important and necessary documents in place so the process can be easier.
  • Select your choice of lender and apply for HELOC
  • You will be given a document to go through, make sure you carefully read what is stated and ask questions if you are feeling uncomfortable with what is stated in the documents
  • The underwriting process can take up to weeks before finishing processing and the final step is for you to close the deal by signing in the paperwork. But note that you have to meet up with the requirements first before thinking about applying for HELOC.


Disadvantages Of A Home Equity Line Of Credit

You might be worried that home equity lines of credit have any disadvantages, yes they do have disadvantages which we will be stated in this article;

  1. If your income is unstable, getting a HELOC can be a very bad idea because due to your unstable income, this might disrupt your monthly payment plan which can take your home from you.
  2. HELOC can require an upfront cost such as application fees, home appraisal, tithe research, and so on, this fee can be so costly most times.
  3. HELOC does not have a fixed interest rate, their rate is adjustable and can be higher and lower depending
  4. You cannot use the money from HELOC to sort out your day-to-day expenses or any basic needs.
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In conclusion, we have talked about how does a home equity line of credit works and other things that you need to know about HELOC most importantly their requirements and how to get it.

Thank you for reading, for any inquiries or questions you can drop them in the section below, and we will be attending to them.