The Significance of Home Equity Line of Credit


Whether there is a wedding coming up, any renovation project, upgradation of your business or college tuition to be paid, you can secure a home equity line of credit (HELOC) which will be available with the lowest fees and rates.

Introduction to Home Equity line of credit

The equity in the home is defined as the market value of the home, subtract the amount you have borrowed.  You can borrow a certain amount of money from the lenders with a home equity line of credit. The amount will be about 80 to 90 per cent of the home equity value.

The money can be borrowed during a period known as draw period. During the draw period, you can borrow some percentage of the money or the whole of it, and you will have to pay interest on the amount that you have borrowed. After the draw period is over, the repayment period will be started. Now, in the repayment period, you will have to start paying back the borrowed amount against the balance of the loan. Moreover, during the repayment period, the customer is not allowed to borrow any money on the line of credit.

The eligibility criterion for a home equity line of credit
There are various requirements that one should fulfil for getting a loan. Some basic eligibility criterion is mentioned as follows which one must fulfil to qualify for a HELOC.

1.    Income
You will have to show proof to the lender that you have sufficient income and that you can cover the new loan payment and the mortgage payment easily.

2.    Other assets
If you possess more assets such as boar, rental property, car, or other investments, then the lenders will feel a lot more secure about offering you their money.

3.    DTI

The ratio of overall debt and income must be low. The ratio, known as debt to income ratio (DTI) needs to be low. If there is any doubt, then calculate the DTI from an online tool.

4.    Good credit score
If you show your lenders that you have a good history of paying back the loans in time, then this strong credit will help you in securing the confidence of your lender.

5.    LTV
There should be 80% loan to value ratio (LTV). You can use an online calculator to calculate this ratio.

How much equity loan can you have?
Let us see the calculation criterion of the equity required for getting a line of credit and the amount that can be borrowed. Just assume that the cost of your home is $250,000 and the mortgage amount left to be paid $150,000. If you have fulfilled the basic eligibility criterion, like an LTV of 80%, etc., then the maximum home equity loan that you can get is $50,000. The calculation criterion is simple. The LTV percentage will be multiplied by the current market value of the home, and then the mortgage balance left to be paid by the customer will be subtracted from the value.

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