Timing matters a lot when you’re dealing with serious financial decisions, especially ones that involve your home. If you’re thinking about using your home’s equity through a Home Equity Line of Credit (HELOC), there are a few things to keep in mind. One of them is when you should apply.
Let’s break down what a HELOC is, how it works, and when it is just right to apply for one.
What Is a Home Equity Loan of Credit?
A HELOC is basically a flexible line of credit that uses your home as collateral. It’s not a lump sum loan. Instead, it works more like a credit card.
With a HELOC, you’re approved for a certain limit of funds, and you can borrow from it. Then you pay it back, and borrow again, usually during a 5- to 10-year period.
Why do people like it? HELOC is appealing because:
- You only pay interest on the amount that you actually borrow.
- The interest rates are usually lower than those of personal loans or credit cards.
- You get flexible repayment options.
You can use these funds for anything. But that doesn’t mean you should jump into it at any time.
When Home Values Are High
One major factor that lenders look at is how much equity you have in your home. You can find out your home equity by calculating the difference between its market value and your outstanding mortgage.
So, when housing prices are on the rise, your equity increases. And this increases how much you can borrow.
Most lenders cap borrowing at around 85% of your home’s value (minus your mortgage), so applying when the market is strong can give you a larger credit line.
When Interest Rates Are Low
HELOCs usually come with variable interest rates, which means that they can change over time. Locking in a low rate when the market is calm can save you hundreds or even thousands over the life of the loan.
However, keep in mind that some HELOCs offer fixed-rate options, and some might give you introductory rates that go up after a year or two. Lenders like Amerisave also offer an interest-only payment model, so you can focus on paying off the interest first.
When You Have a Specific Use Case
Don’t apply for a HELOC just because it’s available. It’s best used when you have a clear financial goal in mind, like:
- Home renovations
- Paying off high-interest debt
- Covering college tuition
If you start borrowing without a clear plan, it’s easy to treat the HELOC like free money and build up debt that’s hard to pay off.
When Your Credit Score Is Strong
Lenders look at your credit score, income, debt-to-income ratio, and home equity when deciding whether to approve your HELOC and how much interest to charge.
Ideally, you want your score to be 700 or higher. And if your credit score needs work, it might be better to wait, improve your score, and apply later for better rates.
Conclusion
A HELOC can be a powerful financial tool, but only if you use it intentionally and at the right time. Look for the sweet spot when your home’s value is up, interest rates are low, you’ve got a clear reason to borrow, and your credit score is strong.
