HELOCs, also known as “home equity lines of credit”, are loans given out by banks and various private lenders. From a structural point of view, HELOCs are strictly secured loans where the borrower must offer his home as collateral, somewhat similar to a second mortgage. As with all lines of credit, the amount of money that the lender receives is usually proportional with the collateral that is required for the loan. This makes HELOCs great choices for individuals who plan to make substantial purchases.
This having been said, what is required to get a home equity line of credit and what are the restrictions that come with it?
First of all, it is important to mention the fact that all homeowners can get a HELOC, and that they can be received on top of the mortgage. While every lender will have different financial requirements for this type of loan, in most cases, the only things required will be owning a home (house or flat), having paid a certain portion of the mortgage on it, and having a good enough credit rating.
As far as the home is concerned, applying for a HELOC will require homeowners to have their home appraised by a professional. This will give the lender an idea regarding how much money can be loaned. Depending on the lender, homeowners may have to either choose their own company for the appraisal or have the bank send someone. Everything from the location of the home to its condition will be a factor in the appraisal process. Once this matter has been concluded, the lender will check the status of the mortgage.
HELOCs are available to all homeowners, regardless if they have finished paying the mortgage or not. However, in the latter situation, the lender may require applicants to have repaid a certain portion of the mortgage before they can get the line of credit. This depends on each lender.
The Credit rating
An individual’s credit rating is important in all bank-related matters. Depending on its value, the lenders will decide if you are eligible or not for a HELOC. Furthermore, your financial track record will also affect the terms and conditions that you will receive from the lender. The better your credit rating is, the lower your interest rate will be. In some situations, lenders may even offer less money based on the applicant’s credit rating.
What Are the Restrictions for HELOCs?
Almost all loans come with restrictions when it comes to what the borrower can do with the money. However, lenders do not typically impose any limitations on HELOCs. The borrower can use the money for any type of purchase and, just like any other line of credit, he only pays interest for what has been borrowed. In other words, a HELOC does not give an individual access to a large amount of money for a particular purchase. Instead, the lender gives the borrower access to a bank credit account that has a certain withdraw limit on it (established in relation to the value of the home). The lender is then free to only withdraw/borrow a portion of the money or to max the account as he sees fit. For example, if the HELOC is £350,000, and the lender is looking to pay for a holiday that only costs £5,000, then he will pay interest only for the £5,000. The rest of the money will be available to him until the agreement ends, however, the lender is not obligated to withdraw a set amount of money.
Lastly, please keep in mind that lenders also place administration fees on HELOCs. These must be paid on top of the monthly interest rate.