What is Home Equity Line of Credit (HELOC)?

As time passes and your property’s value increases while you pay your home loan, your equity in your house also rises. Your equity in the property is essentially the difference between its current market value and the outstanding home loan on it. You can leverage this equity to avail of a Home Equity Line of Credit (HELOC) that works as a revolving line of credit that you can use for home improvement expenses or to pay off a high-interest credit card debt.

How Home Equity Line of Credit Works 

First, the lender will evaluate your equity in the property by deducting your outstanding home loan from the property’s assessed value. You can borrow anywhere between 60-85% of this amount. Let’s take an example. If your house is valued at Rs.60 lakhs and you still have Rs.30 lakhs due on your home loan, you own Rs.30 lakhs in home equity. You can use this to borrow up to Rs.25.5 lakhs subject to a number of factors such as your credit score, income, property document clearance, etc.  

The draw or waiting period is typically 5 to 10 years long – during which the borrower only pays off the interest component on the loaned amount. The borrower starts repaying the principal amount once the draw period ends.

How HELOC is Different from Fixed Home Equity Loan 

A fixed home equity loan is repaid in fixed monthly installments over a decided number of years at a fixed rate of interest. A Home Equity Line of Credit (HELOC) is a revolving credit similar to a credit card in function; it allows you to utilize only as much credit as you require without having to pay interest on the unused balance. HELOCs also generally have a variable rate of interest.

Reasons Why You Should Avail a HELOC 

The money you borrow with a Home Equity Line of Credit (HELOC) can be used for any purpose. However, the main reasons borrowers avail of a HELOC are: 

i) To fund home renovation projects: If done with a plan in mind, this can actually raise the value of your property giving you more equity in the house. It’s a convenient way to finance such projects because you can borrow only the amount that you need to make payments in each stage. 

ii) For low-interest line of credit: If you find yourself in a mountain of debt with medical bills, high-interest credit card dues, etc., you can pay off high-interest debts with a low-interest HELOC. If you’re considering this, it’s important that you remember the risk involved in case you keep increasing the debt on your HELOC. Make sure to pay off your HELOC debt responsibly to avoid losing ownership of your house in the case that you’re unable to.  

ii) Other Reasons: People also use HELOC to pay their children’s tuition fees or to finance their new business. No matter where you put the funds, make sure to be wary of the potential consequences in case of failure of repayment.  

HELOC – Eligibility 

Once you apply for a HELOC, the lender will conduct a property assessment to understand the value of your home and to determine the equity you have in it.  They will furthermore run a credit check and evaluate your property documents and information related to your income, obligations, etc., before deciding on whether you qualify for a Home Equity Line of Credit. A credit score of 650 and above is preferred; your credit score and the equity you have in the property are key factors that influence your loan terms. If your home equity is low, having a high credit score may prove helpful in availing a HELOC with beneficial terms. Lenders will also check your Debt-to-income (DTI) ratio or the portion of your income that is used to pay off outstanding debts, your employment status and duration, and your financial history particularly past cases of foreclosures or bankruptcies. 

It’s clearly important that you keep an eye on your credit score and take measures to keep it as high as possible. Get your free credit report now to check your current score. Remember, improving your credit score increases your chances of qualifying for Home Equity Line of Credit. And of course, you can always reach out to our financial advisors at xyz@fincity.com for assistance on how to improve you credit score quickly. 

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