As more Americans consider a home equity line of credit as a way to fund major purchases and projects, we hear a lot of questions about them at WEOKIE. We’ve answered a lot of those questions in our brand new and completely free eguide: “Understanding & Using a HELOC to Finance Your Next Big Project.”
If you are new to the idea of a HELOC, here is a quick rundown of the basics:
A HELOC is a line of credit based on the equity of your home. Unlike a home loan that disperses in one single lump sum, a HELOC has a max amount, which borrowers can access during the life of the draw period in whatever amount and frequency they want. HELOC funds can be used to fund anything, but most people choose to use them for home improvements, renovations, education, or debt consolidation.
In this blog post, we are going to talk about the things you can do before applying for a HELOC! Here is a step-by-step guide to making sure you are ready to apply.
1. Pay down debts and improve your debt-to-income ratio
Although many people plan to use their HELOC to consolidate debt and get a lower interest rate than what they are currently paying, there are still benefits to reducing your overall debts before you apply.
Just like it is for many other types of loans, including mortgages, the highest debt-to-income ratio you can have and still be approved is typically around 43%. Sometimes, if you have other factors in your favor, you may be able to get a HELOC with up to 50% DTI. Even so, the better your DTI, the better off you will be when you apply for a HELOC.
Need to get out of debt? We’ve written about that before! Check out our blog post about getting out of debt for strategies to improve your DTI before you apply for a HELOC.
2. Know your credit score and improve it if you need to.
Your credit score helps lenders determine your interest rate. A better credit score means you are a better loan candidate, and therefore, you will be rewarded with a lower rate.
HELOC interest rates average to about 5.51%, so they are definitely a safer and more cost-effective way to fund a major project than putting expenses on a high-interest credit card.
There are several free ways to find out your credit score. (If you have a WEOKIE account, be sure to check with us so that we can help you learn more about your credit score.) Standard advice is that you need to have a score of at least 700 in order to be approved for a HELOC. Although you may be approved in the 660-699 range, your interest rate might be higher.
3. Know how much equity you have in your home.
According to NerdWallet, calculating your equity is easy if you have the right information. They explain:
“To determine how much you may be able to borrow with a home equity loan or HELOC, divide your mortgage’s outstanding balance by the current home value. This is your LTV. Depending on your financial history, lenders generally want to see an LTV of 80% or less, which means your home equity is 20% or more. In most cases, you can borrow up to 80% of your home’s value in total. So you may need more than 20% equity to take advantage of a home equity loan or HELOC.”
If you don’t yet have 20% equity in your home, you are unlikely to be approved for a HELOC. Keep paying those mortgage payments and work towards 20% and higher before you apply. If you need to build equity quickly, consider paying a bit more than your mortgage payment every month.
4. Familiarize yourself with your home’s value.
Your HELOC will be based on the appraised value of your home. When you work with a lender like WEOKIE, the lender isn’t the one deciding on the value of your home, but an appraiser is. The appraiser compares your home to other similar homes in your neighborhood to determine value.
5. Talk with experienced lenders to get advice about whether a HELOC is the right path for you.
We invite you to contact us with any questions you may have about HELOCs, home equity loans, and other options for funding major projects and dreams. Don’t forget to download our free eguide, “Understanding & Using a HELOC to Finance Your Next Big Project,” to learn more about how HELOCs work and how you may be able to use one.
*See a WEOKIE rep for details. Federally Insured by NCUA.