The COVID pandemic has hit many families worldwide since its outbreak in March last year. As the coronavirus has spread and workplaces have closed, millions of workers have partly or completely lost their income. For this reason, looking for ways to generate income has now become more imperative than ever.
Sure, you may rely on your credit cards to have a steady line of credit. But according to CNBC, now is the best time to apply for HELOC as backup funding during this pandemic. Consider getting this emergency lifeline before this opportunity runs out. Besides, the average interest rate on a HELOC is around five percent.
In this article, we’ll delve into what HELOC entails and how you can benefit from it during this pandemic.
What HELOC is and how it works
HELOC stands for Home Equity Line of Credit. It is exactly what it sounds like — a revolving line of credit. To use this line of credit, homeowners need to tap into their home equity. Home equity is the difference between your home value and your outstanding balance on a mortgage. Simply put, it is the value of the interest in your home.
As a homeowner, you have two options in leveraging your home equity: a home equity loan and HELOC. The former acts like a second mortgage, where you borrow a lump sum of money against your home equity. The latter entails borrowing money up to a certain amount over a period of time. It works like a credit card where you can tap into the fund whenever necessary, and the balance gets replenished when you pay back.
What to consider when applying for HELOC
If you’re looking to apply for HELOC, there are few key requirements to keep in mind. Take note of the following qualifications:
- Home equity: Lenders will only approve your application if you have enough home equity. For the most part, you get ample equity if you have already paid at least 15 percent of your home value. As mentioned, equity is the difference between your home value and the outstanding balance on your mortgage.
- Debt-to-income ratio (DTI): This ratio determines your capability to pay as a borrower. You compute the DTI by dividing the total monthly payments by your gross monthly income. While DTI requirements vary from one lender to another, they must typically be less than 36 percent. This means that your debt must be less than 36 percent of your gross monthly income.
- Credit report: Prospective lenders will also be looking at your credit standing. This includes your credit score (around 600) and your credit history (zero to minimal delinquent payments).
- Income source: Lenders will also ask for proof of your income source. So whether you’re employed or running a business, be sure to provide pay stubs and even W2s and tax returns.
Before you take the plunge into applying for HELOC, it’s best to consult your real estate agent to see if you have enough equity on your mortgage. Or reach out to a loan officer to see if you’re qualified for HELOC.
Why HELOC is beneficial during the pandemic
Now, you may be wondering why you must consider applying for HELOC amid the pandemic. Here are some benefits of doing so:
- Emergency fund: A HELOC fund will cover at least three to six months of your expenses. This can help you out during rainy days such as the pandemic.
- Home improvement projects: Home renovation projects have surged during the pandemic as many homeowners reassess and recalibrate their living spaces. If you don’t have extra money for this, consider tapping into your home equity.
- New Business: If you’re looking to launch a new business during this pandemic, you can use the money from HELOC for funding.
- Tax benefits: You can take advantage of some tax benefits if you’re looking to purchase or improve your property that’s securing your loan.
- Interest rate: You may want to take advantage of HELOC’s lower interest rate. Its average rate is around five percent, while credit cards have an average rate of 16.32 percent.
- Debt consolidation: If you have several existing debts that you want to pay off, getting HELOC can be a viable solution. You can use the funds to settle most of your loans, especially those with higher interest rates. That way, you can save up on your interest by consolidating your debts through HELOC.
At this point, you now know what HELOC entails and how it works. Be sure to consider all the valuable information discussed above. Whether you need extra money to launch a business, pursue a home improvement project, or simply get by during a pandemic, a HELOC can help you out.