Home Equity Line of Credit – When to Apply
A home equity line of credit can be an excellent source of readily available short term financing that can be used for any purpose.
The basic qualifications are solid credit, loan to value amounts of 75% to 80% of the property value depending on the mortgage program and lender, and a repayment assessment based on the three year fixed term rate for a fully funded mortgage.
The financing rates can be prime to prime plus 2 and the outstanding balance is always open to repayment without penalities.
Higher income home owners with good credit would likely qualify for this type of low cost short term or bridge financing any time they wanted while others may not be able to pass the prepayment test for the combined first and second mortgages that will be registered against the property.
Depending on what you’re motivation is for securing a line of credit, there will be different strategies for applying.
Ideally, a home equity line of credit is a great source of contingency financing and cash reserve to protect your family and cash flow from unexpected events. But like most forms of low cost financing, it will be very difficult to secure if not impossible at a time when you really need it if the your circumstances have strained your credit and/or reported earnings.
If this is your motivation to secure a home line of credit, then the best time to apply is simply when you would qualify.
That may sound a bit strange, but its also the nature in which financial institutions grant approvals for prime or prime plus financing.
As an example, if there are two working home owners, each with a good paying permanent job and good credit, the prospects of applying for a secured line of credit on a property that has available equity would be likely be very high.
But if one of the home owners was laid off and the family as a whole was struggling with managing cash flow for a period of time, it would be unlikely that a secured line of credit would be approved at that point.
The same is true of the self employed. You will have greater success applying for secured and unsecured lines of credit right after a good year, whether you truly need the money or not.
Once you have the secured line of credit in place, you can use if for whatever you like. So if there is a time when additional funds are required, for whatever reason, you will have a financing reserve system all set up.
And as long as the balance on the line of credit sees movement up and down over time, you’re not likely to have any issues with the bank. If you are sitting at the maximum amount of the line for a year or more, they may review your account and even reduce the line. But even if that came to pass, you would still likely be able to easily term out this second mortgage due to the fact that there is still at least 20% equity in the property and the available funds have likely helped protect your credit.
The current recessionary period only reinforces the need to have a some sort of financing back up plan to deal with the unexpected and unplanned and a home equity line of credit can be a great way to accomplish that.
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