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What is a Home Equity Line of Credit and How do They Work?

woman holding up a paper house and cash representing a Home Equity Line of Credit

Home equity lines of credit (HELOC) are loans secured by the equity in your home. Let’s say your home is worth $300,000 and you owe $225,000 on the mortgage. That’s a potential credit line of $75,000 to use as a personal loan or business loan or other purposes. HELOCs often charge a lower interest rate than other loans and interest may be tax-deductible, making them very attractive financial tools (whoop!). The experts at White River Credit Union have all the details on HELOCs and how you can benefit from them.

What Are the Advantages of Home Equity Lines of Credit?

Unlike a credit card, HELOC has a growing limit as you pay down your mortgage or your house increases in value — or both. A condo worth $300k today might be worth $350k in five years. If you pay down your mortgage from $225k to $200k, your HELOC potential increases from $75k to $150k. If you don’t use it, it swells. As you age or your family grows, this is money in the bank.

Like a credit card, the balance is revolving — as you repay the loan, the credit available is replenished. If you use your HELOC instead of a car loan to repair or replace a car after an accident, the money doesn’t go to a finance company, it goes back into your home equity, ready for the next emergency. You’ll pay interest, but, again, probably a lower rate than other loan options.

Qualifying for a HELOC

Obviously, you need good credit to take the best advantage of HELOCs, and you do risk losing your home if you don’t repay the loan.

To begin, you need a suitable debt-to-income ratio (DTI). This is the basic measure of whether you can afford to borrow more than what you currently owe. Let’s say your current income is $4,000 per month and you have debts (alimony, child support, personal loans or business loans) totaling $1,600. Your DTI is 40% — that’s almost the limit for a traditional fixed-rate, fixed-term home equity loan, which federal regulations set at 43%.

White River Credit Union Can Help!

White River Credit Union can help ensure that you have cash available whenever you need it in Enumclaw, Maple Valley, Buckley or Black Diamond areas and beyond. Want a line of credit as checking overdraft protection, a credit card or a HELOC? Contact us today for more information. We’d love to help, after all, it’s more interesting here! 

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