A Home Equity Line of Credit
The best time to get money is when you do not need it. What do I mean by this? You may have good credit, a good job and money in the bank, but this can change very quickly. You never know when you might have a crisis or emergency that you are financially unprepared for. Or you get laid off out of nowhere and it takes 6 months to find comparable employment. These sorts of circumstances may cause you to get behind on your bills. If this happened, even the best of credit would suffer and your credit scores would go down. It can be years before you will be able to get decent credit accounts with reasonable rates. All is not lost however.
Home Equity Lines of Credit
If you own a home, have some equity and do not have a home equity line of credit (HELOC) – get one. This is cheap money if you need it. I think that most people think that if you have a mortgage on your house that you will be charged monthly for it. The beauty of a HELOC is that you only pay for what you use. You could have a $100,000 line of credit with a zero dollar balance and you would pay nothing each month. It’s something you may never use but at least have available as a just in case.
If you are planning on getting a mortgage or are already in the loan process, add a home equity line. Your loan officer can do it for you very easily while your loan is in process. The same documentation you need to do your first mortgage loan can be used to do the second home equity loan as well. You can kill two birds with one stone. You can sign for both at the same time that you sign your first mortgage. If you do not draw on the HELOC you will not be charged anything, so just let it sit there. You may never need it anyway. It will give you peace of mind to know that it is there.
I recently used my home equity line to purchase an investment property. I saw a house that I wanted to buy as a rental property. I needed to move fast. Years ago, before I became a mortgage broker, I had been advised by a friend of mine to get a line of credit on my house. I did get and did not use it for several years. Most home equity lines come with a credit card and check writing option. In my situation with wanting to buy this investment property I was able to just wrote a check right from the line of credit for the earnest deposit. Luckily, I had not used my HELOC much and had the flexibility to be able to use it when I needed it. For others, there may be times when you lose a job or have a medical emergency. If this happens you will need access to cash. Again, if you have setup a HELOC ahead of time you could save yourself from a lot of financial problems and stress.
What Does a Home Equity Line Cost?
The good news about home equity lines is that you can get them virtually for free or only a couple of hundred dollars. For the kind of buying power that you can get from it, it is worth way more than that. Most usually come with an annual fee. It is usually less than $50 per year. Mine is $25 per year through Bank of America.
One consideration that you will need to pay attention to is that as the mortgage and real estate industries change, mortgage banks and lenders make HELOC’s harder to get. These loans are more risky for the lender to give you so they are careful in how they make them available to home owners.
Recent Changes In Obtaining a HELOC
For example, in 2007 there has been an historical real estate and mortgage industry crash. For the first time in decades home values nationwide have gone down. With this in mind, lenders are not allowing HELOC’s to go to 100% loan to value. The loan to value ratios have dropped for 100% to 90%. The documentation requirements are tightening up as well. Recently, lenders like Citibank had programs where all you needed to provide was proof that you were working to satisfy that you made enough money to be able to pay for the payments. For good reason, now they want to see how much you are making every month with pay stubs from your employer, and they want to see how much money you have in the bank. They want to see your asset statements. Another example of tightening guidelines is that before certain types of HELOC’s were okay for someone with a 660 or above credit score. Now, those sames HELOC’s are only available if you have a Fico score 0ver 700.
Written by Dave Mason, Realtor, Mortgage Broker
For more information, visit Are You a Homeowner? Get A Home Equity Line of Credit