Equity on the Line

What to know about HELOCs

If you need cash for a large purchase, you might consider a Home Equity Line of Credit (HELOC). These types of loans allow you to borrow against the value of your home. Here is what you should know.

The Basics

A HELOC is a form of credit that acts similar to a credit card. It allows you to borrow against the value of your home and then repay it as you go. You’re borrowing based on the equity, which is your home’s value minus what you owe on the mortgage. This repayment plan only lasts usually about 10 years. After that, you must pay back the amount you borrowed in regular payments.

What You Need

Not everyone will be approved for a HELOC. While lender requirements vary, you will usually need the following:

Lender requirements will vary, but here’s what you’ll generally need to get a HELOC:

1. Home equity of 15 percent or more
2. A debt-to-income ratio lower than 40 percent
3. A good credit score, usually 630 or higher

The Pros

HELOCs have a few upsides. Because you’re putting up your home as collateral, lenders view these loans as lower risk. That means you’ll be getting fairly low interest rates compared to other types of loans. Also, during the repayment period you only pay the interest, which keeps your payments low.

The Cons

As you might guess, the major downside of a HELOC is that if you fail to repay the loan you could lose your home. The other big downside is that HELOCs have variable interest rates, so if they go up by a lot, it might make payments too much. Consider your financial situation before taking on a HELOC.