If you owe less on your house than it’s worth, you have equity. That gives you some options if you’re ever strapped for cash because of unexpected medical bills or a prolonged period of unemployment. One of the most common ways to access the equity in your home is by getting a home equity line of credit (HELOC). HELOC’s are popular because of the flexibility they afford. They aren’t without risk, however, and before you apply for a HELOC, you need to know how they work, how you qualify for them, the risks involved, and what your options are if you’re don’t satisfy the requirements.
How Do HELOCs Work?
HELOCs are revolving lines of credit, like a credit card. You draw money out of your account, as you need it, by writing checks or using a credit card associated with the account. You won’t be able to exceed the credit limit. The amount you repay is based on the money you draw out of your account, not on the total amount borrowed.
You can draw money as needed for a set period of time (typically 10 years) before the repayment period.
How much money can I borrow?
Depending on the strength of your credit, you will be able to borrow up to 85% of the appraised value of your home, minus your outstanding mortgage.
For example:
You have a home appraised for: $300,000 x 85%
85% of its appraised value is: $255,000
Your mortgage amount: -$200,000
The potential line of credit: $ 55,000
(This example presumes there are no liens against your property.)
Do I have to pay interest on the loan?
Yes. Most HELOCs have variable interest rates. That means that the rates (and your payments) can go up or down over the life of the loan. You should consider a fixed-rate loan if you can get one. The rates may seem higher at first, but your payments will always be the same.
Are there other fees that have to be paid?
Yes. You’ll have to pay most of the same fees you paid when you got your original mortgage. These costs add up and can substantially increase the cost of your loan. Fees you have to consider include:
- Application fee
- Title search
- Attorney fees
- Appraisal
- Mortgage preparation
- Mortgage filing
- Transaction fees
- Annual fees
- Points (a percentage of the amount you’re borrowing)
Some of these costs may be negotiable. Be sure to ask your lender what flexibility they offer.
What are the loan repayment terms?
You can draw on the money for a set period of time (usually 10 years). At the end of that time, you will either make a balloon payment (meaning you have to pay the loan off in one lump sum) or you will start a repayment period that can last as long as 20 years.
If you don’t make your payments on time, the lender may consider you in default and demand immediate payment in full.
What do I need to qualify for a HELOC?
Lender terms vary, but the following HELOC requirements are good general guidelines.
- 15% – 20% equity in your home
- FICO score of 620 (minimum). Some lenders will require 680 or above to give you the best interest rate.
- No late payment history
- A debt-to-income ratio of no more than 43% (The lender may accept 50% with a high credit score and lots of equity.)
How do I figure out my debt-to-income ratio?
First, you add up all your monthly debt. That includes financial obligations like your mortgage, car payment, credit cards and other loans, child support, and alimony. Then, divide that number by your gross monthly income.
For example:
A monthly debt of $1,800 divided by a gross monthly income of $4,000 = 45%.
Are HELOCs risky?
They can be. There are always risks associated with borrowing money. HELOCs are no different. The three biggest disadvantages to consider are:
- Possible foreclosure. Your home is the collateral for your HELOC. If you default on your loan, you could lose your house and ruin your credit.
- Uncertainty. If there is a downturn in the housing market, your home could lose value in which case the lender might reduce or freeze your HELOC. The same could happen if you start having credit problems, and the lender reevaluates your loan.
- Added debt. A lot of homeowners use their HELOCs to pay off high-interest rate credit card debt. This is a great idea, unless you turn around and start accumulating debt on the credit cards again. Many homeowners end up with even more debt than they had in the beginning.
What are my options if I get turned down for a HELOC?
Personal loan. These are unsecured loans, so you’ll need good credit to qualify for one and won’t have more than five to seven years to pay it back. If your credit isn’t great, you’ll be looking at a high-interest rate, that is, if you can qualify at all.
Cash-out refinance. With this option, you pay off your first mortgage with a bigger loan and keep the cash difference. Many lenders require borrowers to have at least 20% equity to do a cash-out refinance.
Regroup. If you have the luxury of time, you can pay down your current debt in order to reduce your debt-to-income ratio, improve your credit score and eventually reapply for a loan.
The Skydan Equity Program Option – The Home Equity Loan Alternative
If you’ve been turned down for a HELOC and don’t know what to do next, consider the Skydan Equity sale and leaseback program. We can get you the FAST CASH you need regardless of your credit score or debt-to-income ratio.
Our NO HASSLE approach is quick and easy. You don’t need to provide income verification or tax returns. All you need is equity in your home.
We’ll buy your house and rent it back to you with NO MONTHLY PAYMENTS and ZERO INTEREST. The rent is deferred for up to two years.
Once the agreed-upon lease period expires, you have two options:
- You can purchase your house from us for the original purchase price plus the deferred rent.
- You can sell your house and keep any profit you make over and above your obligation to Skydan.
If you’re looking for an alternative to home refinancing in Chicago, give us a call today. We can help when the banks and mortgage lenders turn you down.