A home equity line of credit can be a smart choice for many borrowers. As opposed to other types of borrowing, a HELOC generally carries a lower interest rate than a credit card or an unsecured loan, and for most people, the interest on a home equity line of credit is tax deductible. The biggest downside, is that if you default on your loan, you could lose your house.
To qualify for a home equity line of credit you need to have equity in your home and the income to pay the loan back. It helps to have a decent credit rating to keep your interest rates down.
Especially in today’s market, the hardest qualification for most people will be finding the equity in their home. As a rule of thumb, most lenders will want your total debt against your home to be no more than 80% of your home’s value. That is including the home equity line of credit.
If you don’t have enough equity in your home there are just two ways to change that. One is to pay down your mortgage and reduce the debt against your home, the other is to increase the value of your home.
If you are looking at taking out a home equity line of credit, you probably don’t want to spend the money to pay down your debt. That leaves increasing the value of your home as the only option to increasing the amount of equity in your home. While you can’t do anything to improve the housing market, you can make improvements and repairs to your home that would increase its value.
You need to show the banks that you have the income to repay your home equity line of credit. If your income is too low, consider paying off credit cards and other debts to make room for the HELOC.
A home equity line of credit is a good option for many people. With it’s low interest rates and favorable tax status it may be worth the time and effort to increase your equity and your ability to pay.