Home Equity Line of Credit: Harder to Get, but Worth the Effort SPONSORSHIP

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The wrong way to use your home equity line of credit: purchasing $1,300 worth of ties, as the current court case of former Illinois governor Rod Blagojevich and his wife, Patti, recently revealed. According to court documents, the governor and his wife were using credit cards and home equity to finance a lifestyle they could not afford.

The Blagojeviches weren't the only ones who tapped valuable home equity in the past decade, only to get caught up in a spending cycle that has made it hard to pay down the debt.

It is those folks -- people who took out home equity lines of credit, or HELOCs, to pay for vacations, boats, automobiles and other big-ticket items -- that may be finding themselves underwater now on their mortgages as their homes have dropped in value.

But unforeseen expenses do come about. And if you've been putting off repairing the roof, or your daughter's wedding is going over budget, using your home equity is one of the cheapest ways to borrow money. And rates are at historically low levels.

These days, home equity loans and home equity lines of credit are harder to qualify for than they were a couple years back, but there are few better lending deals out there right now.
While home equity loans and lines of credit have become more difficult to obtain recently, it's less about lenders not wanting to lend, and more about people not being able to qualify.

The good news is, for those who do qualify, a home equity line of credit is among the lowest-interest borrowing you can do. As of the first week in July, the average rate was 4.77 percent for a HELOC, while average for a home equity loan averaged about 7 percent, according to Bankrate.com.

A home equity loan is a one-time sum that is paid off over a set amount of time, with fixed monthly payments and a fixed interest rate. A line of credit is more like a credit card: you can borrow from it as you need, up to a certain amount. Payments will vary based on how much you owe, and the interest rate will vary.

If you want to approach your bank about obtaining either a home equity loan or a line of credit, there are a some things that will help you gauge whether you will be approved.

Do you have a good credit score?

Do what you can to keep your credit score in the 700 range. The higher your credit, or FICO, score, have a much better chance of being approved for any type of loan.

Do you have a lot of equity in your home?

If you put 20 percent down, and the value of your home has not dropped precipitously since you purchased it, then you are in good shape. Lenders will not approve home equity loans to anyone who does not have at least 20 percent equity in their home.

Can you go to a smaller bank?

If your credit rating is good, and you have a good amount of equity in your home, then you are ready to approach your bank. But shop around. Not all banks are offering the same rate. And don't rule out smaller, community-based banks and your credit union, if you have access to one. They have competitive rates, and right now, they are more willing to lend than some of the bigger banks that have become gun-shy about making any kind of loan. Online lenders are also a good option.

While too much debt, especially home equity and mortgage debt, is a main contributor of what has gotten our economy into the mess we are slowly climbing out of, we can't abandon borrowing altogether. But we can be smarter about it.

Fixing the roof – good reason for a HELOC. Another silk tie? Not so much.
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