A home equity line of credit (HELOC) is a versatile financial tool that gives you access to a portion of the equity of your home. You can then spend money from an account as though it was a credit line -- though repayment will usually begin immediately under the terms negotiated with your bank. Though a HELOC is a great tool, there are things you should consider when trying to determine whether it's best. So what's the right time to get a HELOC?
When You Have Sufficient Equity in Your Home
A HELOC operates similarly to a second mortgage. It impacts how much equity of your home you truly own outright. Because of this, you generally want to get a HELOC when you own most of your home or even own your home entirely free and clear. The more equity you have in your property, the larger your HELOC is going to be -- but by the same token, spending that money means that you won't own that equity in your home.
When Your Credit Score Is Favorable
Different banks have different lending parameters, but a favorable credit score is often considered to be one in the high 700s. A good credit score is an important factor; not only does it control whether you will be given a HELOC, but it also controls the interest rate that you are locked into. If you can improve your credit score before applying for a HELOC, it's generally a good choice.
When You Need a Flexible Line of Credit
The alternative to a HELOC is a Home Equity Loan. If you need a lump sum for something -- such as college expenses for a child, or buying a car -- a home equity loan may actually be preferred because it will have a lower interest rate and a more straightforward payment structure. But when you aren't sure how much you're going to spend (such as for home renovations or other large expenses), a HELOC will usually be better.
It should be noted that having a HELOC in place and not accessing it is rarely a bad thing. It will not adversely impact your credit line to have an open HELOC; at most, it will simply increase your amount of credit available. If you can apply for one before you need it, it can be useful to have around -- depending on the terms.
Contact a company like Rio Grande Credit Union for more information and assistance.