HELOC: How Does It Affect Your Credit Score?


Homeowners who wish to renovate their homes, subsidize colleges, or pay down bills might consider using their home equity to earn a home equity line of credit. Although HELOC can be a big help when you need to borrow money, it can also put your assets at risk if you can’t repay a loan.

Additionally, home equity line of credit (HELOC) can positively or negatively impact your reputation, depending on how you manage your account. Your credit rating will increase if you pay on time and keep the amount borrowed from Home equity line of credit relatively low. However, late repayments may hurt your credibility and overall financial situation.

What is a Home equity line of credit? 

HELOC is the revolving line of credit that enables you to borrow against the equity in your house. The amount you can borrow is the estimated value of your home minus your remaining mortgage balance. You can use these funds in line with your necessities. 

Most creditors cap a Home equity line of credit at 60% and 85% of your home’s appraised value. They will also evaluate other factors, including your creditworthiness, to determine your credit limit. For example, if the current value of your house is $420,000 and your mortgage balance is $150,000, your home equity will be $270,000. In this case, the creditor may offer you up to $229,500 in HELOC, assuming you meet other eligibility criteria.

HELOC’s operate similar to bank credit cards. You can borrow as much money as you need, but up to a specific limit. Unlike credit cards, HELOC has a fixed “payment period,” usually ten years, during which you can receive funds. You will pay interest-only mortgage payments on the borrowed money during this period, although you can add additional costs to the principal balance. When the draw period ends, the creditor will typically divide the principal repayments over twenty years, or you can refinance the mortgage.

Furthermore, HELOC is different from home equity loans. Though a home equity loan also depends on your home equity, it is more like an installment loan than a revolving line of credit. This means that the lender distributes all the funds at once, and you must repay them over the entire loan term. Home equity mortgage loans have a fixed interest rate, but the HELOC interest rate is usually variable.

HELOC and your credit score 

The impact of a Home equity line of credit on your credit score depends on how you use your funds and manage your account. You can improve your credit history by making regular payments on your HELOC. However, as with any credit account, if you delay payment, your score will be affected.

If you use a lot of available credit on your credit card, you likely have a high debt utilization rate that may hurt your score. Using HELOC to settle your credit card balance will reduce your utilization rate and increase your points.

A common misconception about a Home equity line of credit is that your account balance is listed in the loan interest rate. However, the difference between HELOC and other credit lines is that—it is guaranteed by your house’s FICO (the most common credit rating used by lenders). Another thing to remember is—your lender will perform strict credit checks when applying for HELOC. Your rating may drop by a few points (if it does), but the impact will decrease over time. 

Pros and Cons

There are a few key benefits to obtaining a Home equity line of credit:

  •  Lower interest rate:

 The interest rate of HELOC is typically lower than that of credit cards and unsecured loan products because your home guarantees them. It means your property is used as collateral and protects the lender in the event of loan default.

  • Get large amounts of money: 

You may not have enough luck to borrow large amounts of cash when applying for a credit card or personal loan. However, if you have several assets in your home and meet other lender eligibility criteria, HELOC will provide you with a better opportunity to get mortgage approval.

  • Flexibility

You can withdraw as much money as you need, up to the available amount provided by HELOC. This means that you will be subjected to pay the interest rates on funds you use. A secured loan does not provide you with this luxury: you must pay interest for the entire loan amount. For example, if you get a HELOC of 80,000 dollars, you only need to pay 20,000 dollars plus interest, but if you get a loan of 80,000 dollars or more, interest will be charged on the entire loan. 

There are some substantial downsides to think about, nonetheless:

  • Lower net worth:

HELOC will reduce the amount of equity in your home. This may be problematic if the value of your home drops sharply and you decide or need to sell it.

  • Putting your home at risk: 

If you are unsure whether you can make regular payments on your mortgage and hold your house, HELOC may not be a good choice.

The Bottom Line

A home equity line of credit can be a viable solution to the cash problem in some cases. Still, it’s necessary to comprehend how it works and whether it’s risking your home. It would help if you learned how HELOC affects your loan before applying. Depending on your financial status and credit rating, there may be better options. Visit our website to learn more.

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