So you’ve made one of the largest investments in your life, purchasing a home. It’s the place you’ll create some of your favorite memories and start the rest of your life. But did you realize it could also be a powerful tool in your financial arsenal? If you’ve never heard of a home equity line of credit (HELOC), it’s revolving line of credit that can used toward large purchases if you have at least 15-20% equity in your home.
Once you’re approved for a HELOC, it essentially functions like a credit card in which you can tap into into it when financially necessary. Here’s what you should probably keep in mind when considering HELOC.
Requirements
Not only will your home equity be evaluated when applying for HELOCs, but your debt on the property against its value is analyzed as well. This is called the combined loan-to-value (CLTV) ratio, which most lenders to be no higher than 85%. Forbes, however, points out that some lenders will offer lines of credit to CLTVs as high as 90%. You can use a CLTV calculator like this one from Chase to assess your ratio.
Interest rates
The amount of credit you can get is directly correlative to how much equity you have in your home. If you have a good amount of home equity, you can be afforded a lower interest rate than credit cards or student loans with HELOCs. Financial institutions may offer discount APRs on home equity lines of credit at sign-up.
According to Truist, the Annual Percentage Rate (APR) for a HELOC is calculated based on a variety of factors, including credit score, loan-to-value, line amount, and location of the property securing the line of credit.
How can HELOCs be used
As mentioned, HELOCs can be used the same way as a credit card, but just like that form of payment, it should be utilized responsibly. Here are some of the other ways you can apply HELOCs.
Debt management
Since HELOCs can offer lump sums of money, it can be wise to use that amount toward any outstanding debts you’ve been grappling with, including your mortgate. As Citizens Bank points out, it’s best to compare the interest rate between a home equity line of credit and your mortgage loan and choose the lower one. HELOCs can also be used to pay off student loans, credit card debt or even catch up on other outstanding living expenses.
Retirement planning
Using a HELOC can help you limit how much you touch your pre-tax retirement money while depending on home equity to float your expenses. If you retire and draw money from your 401(k) or IRA before age 59 ½, you may also face an early withdrawal tax penalty. This can be avoided with the help of a HELOC.
Will you consider getting a HELOC?
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