A home equity line of credit is a form of revolving credit that uses your home as collateral for the loan. With a home equity line of credit (also known as a HELOC) you typically have a “line” or a certain amount of credit, that you can draw from as needed. You do not need to draw the whole amount at once. One of the benefits of a HELOC is that you can borrow only what you need.
The benefits of using a HELOC, as opposed to a credit card, is that HELOC’s usually have a lower interest rate than credit cards, and the interest you do pay can be tax deductible.The biggest downside to a home equity line of credit is that unlike credit card debt, your loan is secured by your home. If you get behind on your payments you could lose your home.
So what does it take to qualify for a home equity line of credit? The short answer is, it takes equity in your home, the ability to repay the loan, and a reasonable credit rating.
Because the loan is secured by your home, most banks will required that you have some equity in your home. As a general rule you can assume that to qualify for a home equity line of credit, you will need to have at least 20% equity in your home, after taking into account the HELOC.
In addition to having equity in your home, you need to be able to show the lender that you can repay the debt. Your lender will look at your income, as well as your other debts and expenses, to determine if you are able to repay the loan.
You also need to have a decent credit score to apply for a home equity line of credit.Without a decent score the interest rate on a home equity line of credit will be higher than if you had a good credit score. The higher interest rate will make your payments higher and make it more difficult for you to qualify for the loan. Sometimes it is better to use a credit card, than to apply for a home equity line of credit.
A home equity line of credit can be a good option for many borrowers. Most people with good money management skills will not find it difficult to qualify for a HELOC.
Resource: What You Should Know About Home Equity Lines of Credit by the Federal Reserve Board