The home equity line of credit, or HELOC, is generally classified as a “second mortgage” loan. It’s a loan that can be borrowed by securitize your home equity. Since your home is the most valuable asset you have, it can be used as collateral for opting a new loan. The biggest downside of the loan is that if you fail to pay back the money, you might be forced to sell your home by the lender.
So, you can surely consider this loan as risky, but it is not necessarily a bad choice. You’ll get the chance of encashing your home’s equity into a huge pool of cash. You can get 85% of your home’s equity, less any existing mortgage balance and adjustments for your creditworthiness.
Interest amount of HELOC will be based on variable interest rates or adjustable rates of interest. Whenever the baseline interest rates goes higher or lower, your interest rates will also do the same. You will be vulnerable to high interest rates, so think twice before taking the opportunity.
The HELOC is riskful but also profitable in nature. If you think to consider this loan as a funding source, you must know in detail about this loan.
Worst time for choosing a HELOC
1. Unstable income - HELOC will be a bad idea for you, if you think that your monthly income may get an interruption. The reasons may be severe and you might be unable to pay your monthly installments. If you miss your payments, the lender might compel you to leave your home. The lender bank may also freeze your HELOC if your home equity decreases or you fail monthly payments. It will cut your line of credit off from the grid and you will have to face foreclosure. Rather than eviction, if the bank pre-assumed your income status and found it as a GREATER RISK, they might restrict you from taking the facility of a HELOC.
2. Upfront costs - HELOC will be expensive like your first mortgage loan. It might include fee of an application, title search cost, appraisal cost, attorney’s fees and purchase price of the points.You might have to pay certain charges which will cost you lots of dollars upfront.
3. Money urgency - If you don’t need urgent and a huge amount of money, HELOC is not for you. Taking a HELOC just for couple of thousand dollars is not a wise decision. In that case you need to have a credit card with low interest rate. It will give you interest free service nearly for next 18 months. You can opt for a secured credit card if you have bad credit score. This is an option which is more affordable and easier than HELOC.
4. Sudden hike in interest rates - Unlike the rare fixed rate HELOC, you need to bear the adjustable rate of interest if you go for a HELOC. Over the total loan period, you’ll need to be alert and ready your finances to handle the increasing interest rates. Though all loans with variable-rates will have caps for lifetime, the rates might get pretty much higher than usual. Is it possible for you to handle that much of pressure? If not, think once again before it’s too late.
Best time to consider a HELOC
A HELOC may be a good idea if you are running out of liquid cash. There are some other urgent and sudden requirements of our life which require immediate monetary support. These are like marriage, educational expenses, childbirth and many more. So, HELOC can be helpful in these cases for sure. Since there is a collateral (your home or property) attached with HELOC, the rates are lower than other conventional home loan types.
But remember, HELOC is best suitable for only one-time funding. If you require extra money for daily spending purpose, HELOC is not worthy for such lame reason. It is advised to get your finances in a shape so that you can be prepared to handle any new debt.
If you expect that you have stable financial background to manage additional debts for a long time (at least for the length of your loan), then apply for HELOC. You’ll get an additional benefit of tax-deduction from your payable interest.
HELOC rates - How to get the best rate?
This will be your choice, the more you look out, the more you’ll get as savings. Look out in different financial institutions for the best deal available.
First, you can ask your primary bank for the discounts, and they might offer a lucrative one to the existing customers. Get a quote and compare with other offers. Check out the bank’s website for this information. Shop around for introductory offers which will be pretty low and expire within a certain period of time.
HELOC is considered as a revolving line of credit just like credit cards. You’ll be getting a limit which gets lower while borrowing and goes higher after paying it back. Another characteristic of HELOC is that it will not accumulate interests as soon as it get starts. Interest only begins accumulating after you borrow the money. The interest rates, approval process will be depending upon the credit history, financial obligations and existing home equity of yours.