As home prices rise. homeowners are building up more equity in their homes, making home equity lines of credit more attractive. Homeowners tend to draw on their home's equity to finance renovations, college tuition expenses and vacations, among other expenses.
While these financial products were all the rage in the mid-2000s and contributed to the 2008 economic collapse, credit-reporting agency Equifax reported an 8% rise in home equity lines of credit from February 2013 to February 2014.
If you're in need of cash, a home equity line of credit may be for you. Keep in mind, if you're unable to pay back the money you've used plus interest, you're putting your home at risk of foreclosure.
When it comes to applying for a home equity line of credit, first determine if you're looking for a fixed rate or a variable rate. Home equity lines of credit tend to have a variable rate, while home equity loans are usually fixed. The upside to a home equity line of credit, is you can draw on the money as needed, similar to a cash advance on a credit card. The bank can help you weigh the pros and cons of each.
"There are home equity lines of credit with a fixed option, which allows you to have the convenience of the line of credit," said Rick Huard, senior vice president of consumer lending for TD Bank.
This option gives the best of both worlds.
Plenty of banks offer home equity lines of credit from the major national institutions, to the regional and local ones. It's
simply finding a match you're comfortable with. This step will take time shopping around for a bank you want to do business with.
You'll also be expected to fill out an application, which asks for basic personal information and background information on the property you own.
"Next, you'll get conditional approval upon 48 hours of submitting the application," Huard says. "They'll ask for verification of some of your info, so expect there to be a back and forth."
He says the entire process should take 30 days. "To speed things up, come in prepared with documentation, as they'll ask for copy of your W-2, pay stubs, last two years of your tax returns if you're self-employed and proof of insurance for the property," he says.
Your credit will also be checked. as the lender wants to have a better understanding of how well you've managed money in the past, before they take you on as a customer. Expect to pay an application fee, which Huard says could cost $100.
The bank will also appraise your home, to get a sense of how much equity you have, which is defined as the difference between the home's value and your mortgage. "Banks typically will use an automated valuation model or go out and hire someone to conduct an appraisal and will usually cover the cost," Huard tells MainStreet .
Once you are approved, you'll stop by the bank for a closing and be able to tap into the equity in your home cautiously.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE .