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4 things to ask yourself before opening a HELOC

Home Blog4 things to ask yourself before opening a HELOC

Key takeaways:

  • A Home Equity Line of Credit (HELOC) enables you to tap into the equity you have in your home.
  • Before opening a HELOC, consider what you can afford, so you don’t put your house at stake.
  • By carefully considering all aspects of a HELOC, you can decide if it’s the right option for you.

Have you heard of a Home Equity Line of Credit (HELOC)? It’s similar to a credit card, with the bank establishing a credit limit based on your income and credit score. However, with a HELOC, your credit limit also takes into consideration how much equity you have in your home.

A HELOC is a great way to access the equity you have built in your home. It can also serve as a convenient and often inexpensive way to borrow money for things such as home renovations, education costs and more. TransUnion reported the use of HELOCs is expected to double between 2018 and 2022 due to a robust economy and continued home equity growth.

But before you get too far imagining what a HELOC could do for you, consider these four things:

How much equity do you have in your home?

Considering a HELOC is based upon home equity, it’s important that you have considerable equity, which is the current value of your home minus the balance you owe on your mortgage, before applying for a HELOC. For example, if you bought your home for $300,000 and owe $250,000 on it, but your home appraises for $400,000, with a standard 90 percent guideline, you may be eligible for a credit line of $110,000. If you cannot make your regular mortgage or HELOC payments, you could end up in foreclosure and lose your home. As with any line of credit, you shouldn’t borrow more than you can pay back.

What limit and rate can you afford?

A HELOC has a variable interest rate that is often significantly lower than credit card interest rates. Determine what the index and margin are for your HELOC. Many HELOCs use the prime rate as published in the Wall Street Journal for their index. This means the rate can change, so ensure you can pay even if it increases. If you cannot make your regular mortgage or HELOC payments, you could end up in foreclosure and lose your home. As with any line of credit, you shouldn’t borrow more than you can pay back.

Are your accounts in order?

A HELOC is subject to underwriting standards, which means you’ll need to provide more information than when you apply for a credit card. As a rule, you’ll need to document your income and employment status, just like you would if you were refinancing your home. Your credit score and repayments on other debts including your current first mortgage will be reviewed throughout the process.

What are the additional fees?

It’s important to ask your lender questions and then read and compare the details in the information you are given when you apply. Determine whether your potential HELOC would include annual fees. Some lenders also charge transaction fees when funds are drawn from the line of credit. There may also be closing costs for setting up the HELOC.

Opening a new line of credit – especially one with your home at stake – is not a decision to take lightly. If you have more questions about opening a HELOC, visit your local MidWestOne branch.

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

MidWestOne is pledged to the letter and the spirit of the United States policy for the achievement of equal housing opportunity throughout the nation. We encourage and support an affirmative advertising and marketing program in which there are no barriers to obtaining housing because of race, color, religion, sex, handicap, familial status or national origin.

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