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 $20k-$25k and the average roof replacement is $7k, it’s no wonder people are tapping into their home equity to fund these necessary improvements. The problem creeps in when people spend the money for not-so-wise purchases, such as lavish vacations and depreciating asets. A HELOC is usually an amazing idea if you can issue restraint – it allows a good amount of flexibility in both borrowing the money, paying it back, and having an emergency source of funds. So here’s what you need to consider when thinking about a HELOC in Boston.
You might not realize this, but a HELOC is actually a second mortgage, secured by your property. A HELOC that gives the borrower access to a pool of cash (line of credit) that is sometimes quite large. 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, while others use it to make a needed major purchase like an investment property, or even a child’s college education.
To qualify for 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 solid score 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.
HELOCs – What to Consider
We are huge proponents of HELOCs, especially in reliable real estate markets that generally appreciate over time. Flexibility is the key – having funds available for when you need them is better than being strapped for cash and having nowhere to turn in an emergency. Before you take out a HELOC in Boston , ask yourself the following questions:
WHAT IS THE MONEY FOR?
You need to be objective and truthful here. 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 repair is a true emergency, but a long-awaited African safari is not. If the purpose of the HELOC isn’t really an emergency, then you are likely better off waiting until 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 teaser interest rate for a year or two, followed by an interest rate tied to the prime interest rate set by the Federal government. As of this writing, mortgage rates are hovering around record lows, so the interest costs are very low. But since the rate is variable after the initial period, you might see a sudden uptick in the future if rates rise. Many accounts have nominal annual fees ($50-$100), but also tack on hefty penalties if you close the account within just a few years of opening it. And if you sell the property for which your HELOC is secured, you will need to pay off the balance upon transfer (which could also trigger this early closure penalty – we paid a $500 fee once with a HELOC that we opened on a property that we sold just 18 months later). 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 Boston. 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.
To get more information about HELOCs, our real estate experts at NextHome Titletown Real Estate can help. Contact us today! (617) 657-9811
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