Unexpected Expenses On The Horizon? Consider Home Equity Loans Or HELOCs

If you own a home, then you’re already well aware of how useful home equity loans and home equity lines of credit (HELOCs) can be for handling major purchases (or expenses) with a low interest rate.

As you pay down your principal each month, you build more and more equity in your home — an advantage that renters cannot claim. Once your equity has reached a significant portion, you may wish to tap into that for things like medical bills and auto or health insurance deductibles.

Since the most common deductible for things like health insurance is around $1,500 per insured person, it can come in quite handy. It can also help you make minor repairs to your car to keep claims to a minimum. This will ensure that your premiums stay affordable and your auto insurance will be there when you need it the most.

Home renovations or repairs? Again, great source!


How It Works

A HELOC basically works like a credit card: you pay interest only on the money you spend. Nationwide notes that you can use a special credit card linked to your line of credit to pay for what you need, when you need it.

“With a home equity loan,” Nationwide adds, “you’re given a lump-sum with a low fixed interest rate. This may be the best loan option if you have a large, one-time expense – for instance, buying a car or paying for a major home renovation.”

Bankrate’s Polyana da Costa notes that home equity loans and HELOCs are making a comeback.

“Lenders are returning to the equity lending business and even loosening their standards a bit, especially after they lost a big chunk of their refinance business when mortgage rates rose,” said da Costa in a recent post for Fox News.

Da Costa continued: “One of the main requirements to qualify for a home equity loan these days is, of course, having equity in the home. During the wild days of lending, you could cash out up to 110 percent of the value of your home. You won’t find that today. But lenders generally allow homeowners to borrow 80 percent to 90 percent of the value of their homes. A few let homeowners tap into all of their equity.”


What About Credit Scores?

Yes, even if you are in your home and making payments every month, your credit score still matters when it comes to those final interest rates.

Gary Harman, vice-president of home equity at Discover Financial Services, points out that the standards will usually vary from one lender to the next.

“Our minimum credit score is 620,” he says, “but the market is all over the place. If you wanted a HELOC, you would need a better score.”

Mike Kinane, retail lending senior product manager for TD Bank, states that they require “a minimum credit score of 660 to 680 for equity loans,” adding that it also depends on factors, such as “how much equity they have and their income compared with their monthly debt obligations.”

If the debt-to-income ratio (DTI) is in the low 40s it helps, Kinane points out, “but the final decision is based on a combination of factors, in which equity plays a major role.”


In Summary

While a home equity loan or HELOC may not be for everyone, they can provide some welcome relief when the unpredictable expenses of life come your way. Before you take that step, though, have a talk with your lender and make sure the circumstances are right. In the case of medical bills, you may be able to go directly through the hospital and pay no interest.

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