When Should You Have a Home Equity Line of Credit in Place?
Lenders allow borrowers to establish home equity lines of credit and to use the lines for any legal purpose. These types of loans are useful to help cover unexpected emergencies as well as to pay for planned major expenses. Generally, HELOCs have lower interest rates than unsecured forms of debt such as credit cards and the lines are useful for people with minimal cash reserves.
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Upcoming Expenses
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Terms offered for HELOCs vary from lender to lender. Some require borrowers to make an immediate withdrawal and maintain a balance for a certain period of time. People using these HELOCs should not set up the line until they have to use it. HELOCs issued by lenders that do not require borrowers to make a minimum draw are more attractive, because borrowers can set them up ahead of time and use the funds whenever they wish.
Emergencies
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Lenders examine the debt-to-income ratios of loan applicants and people with high debt levels and minimal income cannot qualify for the loans. For instance, someone suddenly faced with severe medical problems and lost work time often experience a loss of income that keeps them from qualifying for a line of credit that could have been used to cover medical bills. However, someone who established a line as a precaution could use it without restriction.
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Unexpected Home Repair Costs
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When hurricanes, floods and severe weather strike certain areas, it often takes several weeks for insurance companies to assess the insurance claims and disburse money to claimants. Additionally, many people struggle to find funds to cover the necessary deductibles. You cannot take out a HELOC on a home in a state of disrepair due to hurricane or flood damage. Many banks in areas threatened by severe weather recommend that homeowners go ahead and take out HELOCs as a precaution to cover short-term expenses after a major storm or similar event.
Get The Best Rate
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Banks periodically offer promotional rates and terms on HELOCs. People who set up HELOCs with lenders that require no minimum draw have access to funds whenever needed, but pay nothing unless they actually use the funds. Homebuyers can take advantage of low rate offers and set up lines of credit at little or no cost that they may never use but will provide them with funds to cover unexpected emergencies. Savvy homeowners should shop around for the best rates.
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