Different things can happen in life — for example, you need money for repairs or to pay off an unexpected debt. A solution to the problem can be a line of credit secured by equity capital (HELOC). You can use HELOC for anything, but remember, your home is at stake, and you risk losing it to foreclosure if you don’t make payments. Therefore, you need a HELOC strategy to maximize your profit!
What is a home equity line of credit or HELOC?
A Home Equity Line of Credit, or HELOC, is a second mortgage through which you can get cash based on the value of your home. You have the option to repay your HELOC in full or in part every month, similar to a credit card.
The HELOC formula works like this: You take out a loan of the house’s value without the underlying mortgage debt. Also, you can apply for a HELOC if you have already paid off the loan and fully own the property.
HELOC strategy. How to make the most of your credit line?
Increase the value of your home
The most common HELOC strategy is home improvement, renovation, and innovation. All this will make the property more attractive to buyers in the future.
Also, when using HELOC for repairs, interest will not be taxed. This will help you save on bills in the future.
Another popular HELOC strategy is using cash to pay off high-interest debts. These can be credit cards, student loans, or car loans. It’s not the wrong way to reduce your monthly expenses and improve your account management so that you keep track of fewer payments.
A non-obvious HELOC strategy can be used if you have significant capital in the house and can fix a low-interest rate. But, you need to work with this option carefully — because HELOC has floating interest rates, and you will likely lose tax benefits.
As a reminder, HELOC loan interest is only tax-free if you use the line of credit to buy, build, or improve a home.
Unfortunately, not everyone has money set aside or a financial airbag. If you are in financial trouble, use HELOC. The term for issuing a credit line is 2-6 weeks, which is a significant disadvantage if you urgently need money.
Requirements for obtaining HELOC strategy
The requirements vary from lender to lender, but the basic list is as follows:
- Debt to income ratio is 40% or less
- Credit score of 620 or higher
- The cost of the house is at least 15% higher than your debt.
Benefits of getting HELOC
It all depends on your goals and financial situation. Definitely, this is not a miracle pill that will help save your budget.
- HELOC helps to improve your home, increase its value, and carry out repairs
- Loan interest is tax-deductible if you use HELOC to buy, build, or improve a property
- Long-term loan and payment
- You can use HELOC to pay off debts, such as student loans. But on the other hand, you run the risk of higher interest rates.
Disadvantages of the HELOC strategy
- Increasing foreclosure — for example, if you start having financial problems. Therefore, we do not recommend using HELOC for people with unstable incomes.
- You can’t afford the costs of HELOC — home appraisal, attorney’s fees, title search, application.
- Interest rate hike — HELOC has an adjustable rate.
- Unjustified risk if you use HELOC for everyday needs. A line of credit will not solve your problems, and you risk losing your home.
Whatever HELOC strategy you choose, plan your budget and consult with a mortgage specialist — for example, you can always seek advice from LBC Mortgage.
Remember that HELOC payments are added to your regular mortgage payments. Therefore, treat this issue responsibly and distribute cash flows in advance.