For many homeowners in Maryland, applying for a HELOC (home equity line of credit) can be a smart move. It enables them to leverage their home equity to access credit for various purposes. These include renovations that have a self-reinforcing effect on your home equity. Other use cases include debt consolidation and emergencies.
However, it's essential to consider the benefits and risks before committing. Below are tips to help Maryland homeowners strategize before applying for a HELOC:
Consider the Risks
A HELOC raises your debt level and monthly payments similar to any other loan type. You risk losing your home through foreclosure if the monthly payments fall outside your budget. Also, HELOC interest rates are subject to change based on market fluctuations. This may affect your monthly payments and your ability to service the loan.
Minimize Utilization of Your HELOC Limit
Maryland homeowners may be able to borrow up to 85% of the current value of their property, less the outstanding mortgage balance. The loan-to-value (LTV) ratio, the loan amount expressed as a percentage of the property’s appraised value, determines the borrowing limit.
However, it is essential to leave a margin. Maxing out your home value makes it hard to leverage property appreciation for future borrowing. It may also limit your future options to refinance or sell the property, not to mention the effect on your debt-to-value ratio and, hence, a potential hit on your credit score.
Make Your Payments Regularly and on Time
A credit repayment delay can lower your credit rating. It may also result in penalties. As such, ensure that you make your payments on time, regardless of any changes in your loan account, which may happen due to fluctuations in interest rates as established.
Most lenders provide options that allow payments to be made automatically. This is helpful in avoiding payment delays. If your lender does not offer such a service, consider setting reminders.
Monitor Your HELOC Account and Balance
You should monitor your HELOC account regularly to monitor changes in your interest rates and loan terms. Regular monitoring also helps you identify payment discrepancies and rectify them before they escalate.
Utilize Your Funds Wisely
Due to its flexibility, a HELOC has several advantages. Still, there are conditions under which it becomes an unfavorable option. Keep in mind that your home secures the loan. This means you are using your most valuable asset to finance other expenditures. As such, avoid financing depreciating assets or zero-return activities such as a new car, vacations, and luxury purchases.
Also, avoid using your HELOC for speculative investments, such as the stock market. These may result in long-term financial burdens. A good practice is to use your HELOC for value-enhancing ventures such as remodeling projects and home repairs.
Pay More Than the Minimum Amount
Make sure you will be able to meet monthly payments without straining your finances. Also, account for potential hikes in interest rates, which may be predicted based on trends and expert analysis. Most lenders only require you to make interest payments during the draw period. However, it would also be necessary to make principal payments during this period, as it's always advised with credit cards. This reduces the loan principal and interest, reducing the likelihood of negative amortization. It also lowers the chances of default during the repayment period.
Compare Rates and Terms From Multiple Lenders
HELOC policies have varying terms. Some lenders may have a shorter draw period with higher fees. In contrast, others may offer extended repayment periods with lower interest rates. It is essential to compare offers from different lenders for terms that suit your financial situation and goals. For example, an extended draw period might appeal to homeowners with long-term remodeling projects.
Get Prequalified
Pre-qualification is a preliminary method of determining the sum you are qualified to borrow from lenders. The preapproval includes a soft credit inquiry check that does not affect your credit score.
Preapproval helps you plan your home renovation or whichever project you plan on funding so you'll have enough funding to complete it without straining your budget. Also, it may result in a streamlined and shorter time application process.
Seek Professional Advice
A financial advisor or mortgage specialist can help determine your eligibility for a HELOC. They can also help evaluate your intended use and financial goals and offer expert advice on what suits you best. Consider partnering with local professionals; they are better positioned to provide personalized HELOC offerings and tailored advice.
Choose Woodsboro Bank for Competitive Home Equity Loan Rates
Woodsboro Bank is a dedicated community bank committed to fueling local growth with competitive lending rates and personalized service. Its HELOC offerings include a convenient online application process, fast approvals, and flexible terms to fit your financial needs. Contact Woodsboro Bank today to secure Maryland's best home equity loan rates.