This lifeline for homeowners is hard to find during coronavirus
Millions of Americans have lost their jobs in the COVID-19 crisis, while others struggle with loss of income or general financial insecurity. If you need to borrow money during the pandemic, perhaps the most cost effective way is to use a Home Equity Line of Credit, or HELOC.
There are several advantages to a HELOC. First, you don’t borrow a lump sum – you have access to a line of credit that you can draw on as needed. If you get a $ 10,000 HELOC but only borrow $ 4,000 at the end, you will only pay interest on that $ 4,000. HELOCs are also quite flexible, giving you five to 10 years to withdraw from your line of credit, then offering long repayment periods ranging from 10 to 20 years.
HELOCs are also relatively easy to qualify, since your home is used as collateral for them. As a result, you can get a HELOC even if your credit score is in the trash. And the interest you will pay on a HELOC is usually much lower than what you would pay on a personal loan or credit card.
But while HELOCs are generally a great borrowing option, during the pandemic they have become more difficult to secure.
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Why Are Lenders Removing HELOCs?
Lenders who grant HELOCs take the risk of not being reimbursed. This risk is mitigated by the fact that HELOCs are secured loans, so lenders can force the sale of a home if a borrower is in default. But it’s a cumbersome process that lenders don’t want to undertake.
Additionally, although HELOCs are secured loans, they are considered second mortgages, while purchase mortgages and refinances are first mortgages. If you default on your financial obligations and your home is foreclosed, your preferred lender gets paid first and your HELOC lender gets paid second. HELOCs are therefore riskier for lenders. This is why some have hesitated to distribute them in recent months, and why Wells Fargo and JPMorgan Chase temporarily suspended HELOC applications earlier in the year.
What to do if you can’t get a HELOC
To qualify for a HELOC, you will need the equity in your home. If that equity exists but you don’t get approval from a HELOC, your next best bet may be a cash refinance, in which you refinance your mortgage, but borrow more than the remaining balance on your existing home loan.
Suppose you want a $ 20,000 HELOC, but you decline it. If you have $ 200,000 left on your mortgage, but you qualify for a $ 220,000 cash refinance, you can use the first $ 200,000 to pay off your current lender and keep the remaining $ 20,000 to use. as you see fit. The downside, of course, is that you will have to pay interest on that $ 20,000. If you don’t use all of these, you’ll lose more interest than you need to. With a HELOC, you could borrow half of that $ 20,000 and only pay interest on the part you needed. However, since mortgage rates today are very low, refinancing with cash may not be a bad idea if a HELOC isn’t working for you.
Also be careful with HELOCs
If you to do get a HELOC, pay attention to its conditions. Like mortgages, HELOCs require payment of closing costs. There will also be rules about when you can draw on your line of credit. In some cases, you need to make a withdrawal soon after obtaining the HELOC. Also, interest rates can be variable, so your rate may increase over time.
HELOCs can be a useful borrowing option when you need cash, but as with any loan you take out, make sure you understand exactly what you are signing up for.