What is HELOC?
A home equity line of credit a.k.a HELOC is a type of home equity loan that lets homeowners borrow money(revolving credit line) against the equity they have built in the house, according to Bank of America. As long as there is some equity in the house, the borrower can continue to borrow money against it and pay it off at scheduled dates. There is always an interest rate that comes with the HELOC.
The simplest way to understand the home equity line of credit is to treat them like credit cards. The only difference is that a credit card provider gives you a credit limit for every credit card you have. Once you max your credit limit, you cannot continue to use your credit card until you pay off some of the money you used.
For example, let’s say that you have a credit card with a credit limit of $3,000. This means that the maximum amount you can spend on this card is $3,000. After this amount, you must pay off some of the money you used before you use the credit card again.
For HELOC, however, you will borrow money from a lender based on the equity you have built in your house. Without equity in the house, you cannot get a home equity line of credit. Your lender will have the maximum amount you can borrow at a given time. You will also have a scheduled date to borrow the money and the repayment date.
HELOC also comes with interest that is paid based on your payment plan. Companies offer competitive interest rates and low fees for HELOCs.
What are the factors that determine your HELOC interest rate?
Like other loans, there are factors and requirements you must meet to qualify for a HELOC.
The following are some of those requirements.
- A good credit score: A good credit score shows investors how you use money and navigate through financial problems. For this reason, your credit score will be used to determine your creditworthiness. Having a good credit score will increase your chances of securing a home equity line of credit.
- Equity in your house: Before you apply for a HELOC, you must build equity in your house. This is because you will be borrowing against it.
- Impeccable credit history: Your credit history will play an important role when it comes to your approval rate. Just like credit cards, the better your credit history, the higher the chance to secure the loan.
The home equity line of credit has two main parts. The first part is the withdrawing period whereas the second part is the repayment date. This means you will be paying off the money as you borrow it.
What is the interest for a home equity line of credit?
The interest rate for HELOCs varies from one borrow to another. Those who have a good credit score, equity in the house, a good credit history, etc. get better interest rates.
According to Bankrate, the average rate for HELOCs is 4.87% where the range is between 2.87% and 21%.
Why would you need a home equity line of credit?
Like any other loan, the home equity line of credit can help you take care of your financial problems. Instead of getting a regular loan, HELOC can give you a chance to fix your projects with ease.
The following are some of the things you can do with a HELOC.
- Debt consolidation
- House improvements
- Take care of expenses such as medical expenses, car purchases, etc.
- Pay for tuition, etc.
