What Is Home Equity Line of Credit?

A home equity line of credit, the same HELOC, is a line of credit that uses your home equity as collateral. The amount of credit available to you depends on the equity of your home; Also on your credit score and debt-to-income ratio. Because assets secure HELOCs, they have higher credit limits and better interest rates than credit cards or personal loans. Although HELOCs typically have variable interest rates, there are several fixed-rate options.

Home equity lines of credit are based on the amount of home equity available. To calculate the equity of your home, you need to take the estimated value of your home; Any existing mortgages, HELOCs, home equity loans, etc. You are subtracting the total balance to earn your equity. Most eligible borrowers can borrow up to 85% of their home equity. For example, someone with a good credit score and debt-to-income ratio, with a house worth $300,000 with a loan balance of $100,000, HELOC can approve up to $170,000.

HELOC rates vary; However, it is generally significantly lower than the interest rates on credit cards or personal loans. However, slightly higher than mortgage rates. HELOC rates are usually variable. This means they can fluctuate in the market. HELOCs have very low or no commission at all. Consequently, they are relatively easy to obtain, making them more attractive than refinancing or refinancing cash.

Home Equity Line of Credit

The terms of each HELOC are different, although they most often have a draw period of 10 years and a payback period of about 15 years. During the raffle, borrowers have the opportunity to use the credit line limit on HELOC, as well as pay the minimum interest. As soon as the raffle period expires, borrowers will have to pay substantially larger payments; To repay a line of credit used during the lottery.

HELOCs have a high risk of debt overload; Especially because they are easy to get because of their raffle and repayment terms. In recent decades, when the value of a home has grown substantially, borrowers have found themselves in their own homes with ever-increasing capital and access to cheap credit through their HELOCs.

Many borrowers are accustomed to only low-interest payments on HELOC during the raffle period. Consequently, not ready to pay HELOC during the repayment period. So they take out another HELOC or home equity loan to repay the first one. They can continue this cycle until the value of their home rises again. When home values fell during the financial crisis, many borrowers who used this method found their homes seized. There is no absolute limit to how much HELOC a borrower can get. The downside is that continuing to remove HELOCs can lead to many risks.

Conclusion

For example, a borrower in 2010 had a mortgage balance of $100,000, $200,000 on a home. This will allow them to raise HELOC to $85,000. In this example, they get this maximum amount. In 2012, they had a mortgage + HELOC. Considering some mortgage payments, the debt is now $150,000; However, their house now costs $300,000, which allows them to borrow another HELOC up to $112,500. This brings their balance to $262,500.

Eight years later, a combination of two HELOCs; Also, their mortgage gives a balance of $250,000 while the house is now at $600,000. This means they can take another HELOC up to $297,500. The homeowner now has the first HELOC repayment period. Accordingly, the second HELOC repayment period will begin in two years.

The main risk for this borrower will be using the third HELOC; Not to cover the first two, but to make minimum payments on all three. In 2022 their second HELOC will move into the repayment period. Suppose the value of their home has not increased at all. In that case, if they can not open another HELOC to help cover the increased payments, they will become accustomed to a substantially inflated lifestyle; Accordingly, more than $500,000 will be owed to a home that owes $100,000 just 12 years in advance.

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