A home equity line of credit is a type of loan made available to homeowners who wish to use the equity of their home as collateral and security for their debt. These loans are essentially a line of credit provided to the homeowner. The line of credit is provided from a financial institution, in which there loan is secured through the equity of your property. The line of credit is pre-approved for a specific spending limit, which is determined using your household income and credit score. A Home Equity Line Of credit works much like a credit card; interest will be charged at a variable rate that is predetermined. When you withdraw money and there is a balance owing on the loan, monthly minimum interest payments will need to be made. The repayment schedule can be chosen buy the homeowner and can last anywhere from 3 years or less to more than 20 years. There are no closing costs when dealing with a home equity line of credit, and you only pay interest on what you borrow. You can also use the interest as a tax deduction when doing your income taxes.
There are 2 periods with a home equity line of credit the draw period and the repayment period. The draw period refers to the length of time in which you can withdrawal money (sometimes up to 10 years). The repayment period refers to the time you would repay the remaining balance of the loan (usually 20 years) making the Home equity line of credit a 30-year loan; keep in mind when the draw period concludes you can no longer borrow money.
What are the Benefits of a Home equity Line of credit?
Home equity line of credit are ideal because they provide easy access for homeowners to get cash relatively fast and have the freedom and flexibility to use that cash for any purpose. A big advantage for a home equity line of credit is that they are considered safer by lenders in comparison to other types of loans because they are secured by your home. Although the interest rates when compared to credit card companies and other consumer loans are much lower, interest rates are actually higher than that of the first mortgage. A Big Benefit to a home equity line of credit is that the interest that is charged is tax deductible. A Home equity line of credit becomes a popular choice for people who are not sure how much they will need to borrow and when. You will usually have access to ongoing credit (cash) for a set period of time, and can make the monthly minimum payments for the interest using the line of credit, or repay it in part or pay it all off. This can be an excellent way to help with short term annual payments, such as university tuition or renovation projects. This can be a great way to increase you property value using the equity as leverage. Another positive is that interest rates will never reach double digits like those of credit card companies.
Do I qualify for a Home Equity Line of credit?
Home equity Line of credit’s incur risk for lenders and therefore as lenders we will ask for the following criteria to approve a home equity line of credit, the traditional stress test that has been introduced as of January 2018 does not apply to our borrowers!
Are you a Home Owner?
If you are wondering if you can get a home equity line of credit the answer is quite simple. You’re only eligible if you’re already a homeowner. However this does not necessarily mean you have to live on the property.
What is your Income?
This one is a given, Lenders will request several pay stubs or a copy of your last 2 bank statements in order to guarantee that an applicant can afford the payments. The more assurance the loaner has with the source of income, the higher the chance that the applicant can qualify for a home equity line of credit. This can also help the lender determine the interest rates
What is your Credit Like?
Your credit history will help the lender determine the interest rate for the home equity line of credit. The lender will receive and review the applicants credit history from the credit-reporting agency. If your credit is good, this provides less risk to the lender and will result in a lower interest rate. However if your credit is bad you may experience a higher interest rate than you would have your credit of been good.
The lender will require a listing of the applicant’s equity. When purchasing a house, larger down payments will decreases the risk a lender takes on. For Regular payments towards, your bills the more equity you have the more likely you are to qualify for a mortgage.
The amount of equity in your property and your home will effect the total amount of money your are able to loan. The more equity you have in your property and your home, the more money you are able to loan.
What kind of rates can I expect?
If you do qualify for a home equity line you can almost always expect the interest rates to be higher than the first mortgage. The reason this is the case is because the first mortgage has 1st priority on the assets of your collateral if the borrower happens to default on the loan
How much can I borrow with a home equity line of credit?
The Amount Of money you can borrow is based on the amount of value you have in your property. To find out how much you property is worth you have to take the total value of your property minus the remaining balance of your mortgage. For example, if your house is worth 800,000$and you have a remaining mortgage balance of 300,000$ than the value of your house is 500,000$. You can expect to receive an 85% LTV (Loan to value ratio) what this means is you can receive up to 85% of the value of your home. Using the previous example you can see that if your total house value is 500,000$ (800,000$ – remaining mortgage balance 300,000$ = total house value) then the Loan to value ratio of 85% would entitle you to a maximum 425,000$ loan.