A home equity line of credit is a loan a homeowner takes out using his house as collateral. Many homeowners apply for a HELOC to perform major repairs or home renovations, or to finance a major expenditure, such as a child's college education. If you opt to sell your home while you're still paying off your HELOC, it could delay or impact your resale plans if you don't have the resources to repay the loan in full. Like any type of loan, rates and terms vary from one lender to another and should be carefully examined before entering into an agreement.
The dollar value of the HELOC you qualify for is typically based on your credit score, as well as the value of your home and the amount of equity you have in the property. Unlike a second mortgage, in which you are given a lump-sum loan, a line of credit is simply open access to a predetermined amount of money, using your house as collateral. For example, if you qualify for a $30,000 HELOC, you can withdraw and use that entire amount at one time, or use it as an emergency backup fund, taking out several thousand dollars here and there. HELOC repayment terms vary based on your lender.
HELOC and Resale
If you decide to sell your home, you will have to pay off your HELOC in full before you can close on the sale. The HELOC is tied directly to your house, and if you no longer own the home, you can no longer use it as loan collateral. This can create problems if your house is underwater, or is worth less than the mortgage amount you have on it, or if you don't have other funds available to pay off your HELOC.
Determining Payoff Amounts
When setting a price for your home, take into consideration what, if any, balance you owe on your current mortgage, as well as the size of the HELOC loan you carry. For example, if you owe $100,000 on your existing mortgage, and you have a $25,000 HELOC in use, you would have to have a sale price of at least $125,000 to accommodate your mortgage and HELOC obligations, or find another means of paying off the difference in your mortgage and paying off your HELOC.
Before you initially apply for a HELOC, take into consideration how long you plan to stay in your home. A HELOC comes attached with application and closing fees, and if you’re planning to sell in the near future, this type of loan could be a poor financial move. Additionally, going against the equity in your home can be risky, particularly in a volatile real estate market with significant fluctuations in home values. While HELOCs are often used to finance home upgrades, homeowners don't always see a direct return on investments. For example, installing a $30,000 pool will not necessarily add an additional $30,000 to your home's value.
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