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The Basics
A HELOC is a form of credit that acts similar to a credit card. It allows you to borrow against the value of your home and then repay it as you go. You’re borrowing based on the equity. You can estimate your borrowing capacity by taking your home’s value minus what you owe on the mortgage. This repayment plan only lasts usually about 10 years. After that, you must pay back the amount you borrowed in regular payments.
What You Need
Not everyone will be approved for a HELOC. While lender requirements vary, you will usually need the following:
Lender requirements will vary, but here’s what you’ll generally need to get a HELOC:
Home equity of 15 percent or more
A debt-to-income ratio lower than 40 percent
A good credit score, usually 630 or higher. Check yours for free with Credit Score in online or mobile banking!
The Pros
HELOCs have a few upsides. Because you’re putting up your home as collateral, lenders view these loans as lower risk. That means you’ll be getting fairly low interest rates compared to other types of loans. Also, during the repayment period you only pay the interest, which keeps your payments low.
The Cons
As you might guess, the major downside of a HELOC is that if you fail to repay the loan you could lose your home. The other big downside is that HELOCs have variable interest rates, so if they go up by a lot, it might make payments too much. Consider your financial situation before taking on a HELOC.
Find more information and apply for a Smartest Home Equity Line of Credit from German American Bank.
Written by Chris O'Shea for SavvyMoney