A home equity line of credit (HELOC) is something many people use when they need to make home repairs or renovations. Considering the fact that the average kitchen remodel costs almost $20,500 and the average roof replacement $6,800, it’s no wonder. The problem creeps in when people spend the money for not-so-wise purchases, Still, a HELOC allows a good amount of flexibility in both borrowing the money and paying it back. So here’s what you need to consider when thinking about a HELOC in Long Island.
In broad strokes, a HELOC is a second mortgage that gives the borrower access to a pool (sometimes fairly large) of cash (line of credit). Typically, the cap is 85% of your home’s value minus the remaining mortgage balance. Most people get a HELOC to make renovations or repairs that will increase their home’s value, and others use it to make a needed major purchase like a new car or a child’s college education.
To qualify for and get a HELOC, you will typically have to have a debt-to-income ratio around the low 40s or even lower. You will also need a credit score of 620 or higher, and your home’s value must be at least 10% to 20% greater than the amount you owe on it.
A HELOC functions much like a credit card. You can borrow against the spending limit as often as you need till you reach the limit, giving you flexibility in how you can use it. The major drawback is that if you don’t pay back what you borrow with a HELOC, you run the risk of losing your home.
What to Consider
The important things you need to consider when thinking about a HELOC in Long Island are:
WHAT IS THE MONEY FOR?
You need to be objective and truthful here because, most of the time, if you need a HELOC you either don’t have or have already spent down your emergency fund. Are you going to use the money in a wise enough way to truly justify the loan and putting your home at risk? Be brutally honest with yourself here.
IS THE PURPOSE OF THE LOAN A TRUE EMERGENCY?
A new roof or HVAC is a true emergency, but a long-awaited cruise is not. If the purpose of the HELOC isn’t really an emergency, then you are likely better off waiting till you can save up the money. The deeper question here is this: Do you have the discipline to leave the line of credit untouched until you really need it?
HOW SECURE IS YOUR INCOME?
When you use your line of credit, you have to pay back that money at some point. And if you can’t pay it back, you risk losing your home. So is your job – now and in the future – stable enough that you won’t have to worry about making payments? Or are your skills in demand enough that if you lose your job, you can quickly find employment again?
WHAT ARE THE ADDITIONAL COSTS?
Keep in mind that you will be paying back more than just the amount borrowed. A home equity line of credit typically carries a 6.8% APR, as well as a $50 origination fee and an annual fee. A HELOC may not be for you if you cannot afford both the payments and the interest and fees – even if you can currently qualify for one.
You must consider all of these things carefully when thinking about a HELOC in Long Island. And keep in mind as well that a home equity line of credit and a home equity loan are different instruments, and one may be better for your situation than the other. You don’t want to risk losing your home. You should, then, consult with both financial and real estate professionals to determine whether a HELOC is right for you.