Many of us can handle complicated, overwhelming duties. We can be multi-tasked. We can face down aches and pains and work long hours on much-anticipated but intricate projects. We perform perfectly when it comes to big projects. However, we tend to be careless and negligent when confronted with little and easy things such as taking out a home equity line of credit (HELOC) loan.
It is such an easy thing to do. We go to the lender, we tell him we want a HELOC loan and he agrees and we sign the agreements. Then comes the best part: borrowing money from the loan and spend it anywhere we want.
However, if you look around, if you read the news, you will find that things are not that easy. Mistakes happen on a large scale. Misusages of the money abound. Late payments come. Insolvency visits. And the worst case, the foreclosure which looks so impossible in your early days of borrowing and spending money befalls.
We are told, again and again, to be discreet with taking out HELOC loans, any loan. So, once again, I am asking, are you ready for this?
Are you eligible for and able to afford the loan?
It is not that you can have a HELOC loan just because you want it. You need to do it at the right time. But first, make sure you can qualify for the loan.
- Qualifications for HELOC loans
1) Loan-to-value-ratio
The loan underwriter will calculate the equity you have upon receiving your request for a HELOC loan. It is the difference between the current value on the house and the outstanding balance on the mortgage. You stand a good chance of being approved if the loan to value ratio is less than 80 percent, which means you have paid more than 20 percent of the principal on the mortgage. Or, it can be considered that your house has increased by over 20 percent in value.
2) Debt-to-income ratio
You lender likes to see a promising debt-to-income ratio where the total monthly payments is within 28 percent of your income before tax and the total debt does not exceed 36 percent.
Total monthly payments may include your mortgage payment, mortgage insurance, HELOC payment and property tax. The debts may include expenses like loan payments or child support.
3) Credit
You don’t have to have excellent credit since you are not applying for a credit card. Generally, a credit score of 620 is enough. Of course, a higher credit score would only make things easier. Understandably, the terms of the loan will be more advantageous if your score is higher.
- Affordability
The flexibility of borrowing is one of the benefits HELOC loans are known for. But before you go on borrowing, shouldn’t you be asking whether you can afford the borrowing?
HELOC loan rates are typically lower but not necessarily. Combining prime rate and margin, the rate can run up to 7 percent, the similar level of traditional loans. That makes taking out a HELOC loan less than a great deal. Higher rate means more payments.
Even if you only have to make the minimum payments, the increasing rate would mean additional dollars. Are you sure you can afford this? Or, are you financially eligible for a HELOC loan? Or, do you know that making only minimum payments may never get you out of the loan?
A HELOC loan has a typical term of 25 years. The repayments have to be made during the later period of the term, which is 10 to 15 years. Do you know that? Are you sure you would be able to repay in full of the money you have borrowed for 5 to 15 years?
And one more thing, do you get the ins and outs of a HELOC loan? Do you know the basics? Do you know how it works?
Let’s go over this again. On your side, are you ready for a HELOC loan?
Do you and your lender have mutual understanding?
Taking out a HELOC loan is essentially making an agreement between you and your lender. You two had better have mutual understanding. Most importantly, since it is your interest that we are talking about, do you know the lender? It is not just knowing him, the thing is, how much do you know about his work ethics?
Would he tell you if you have better choices than a HELOC loan? It may sound ridiculous. What kind of lenders would tell customers there are better deals? Believe it or not, this tells much about the personality of your lender. And you may have a hard time trusting a lender who knows nothing but puts upon or takes advantage of you. Or, it is not even worthwhile doing business with such a lender.
Does he give his word about the rate or write down the agreement on paper? Is there a cap on the interest? Or, is he going to raise the interest any time he wants? Now that we are on the interest thing, does he tell you how the interest is to be arranged? Does he tell you that the interest on a HELOC loan is variable and can go rather costly if the rate on the market goes up?
Would he let you know if there are changes happening on the terms? Or, would he be that kind of dealer who goes against your wishes and makes changes to the terms without your knowledge or approval? A few lenders inform their customers of the possible means to reduce the loan principal. Is your lender that kind and informative and willing to tell?
You do have a lot of questions for your lender, whether he is your old lender or a new one. These questions may sound obnoxious and frivolous. It may sound you are asking for troubles. But just remember, smart homeowners do this. And you should, too.
