How Does A Home Equity Line of Credit Affect Your Credit Score?
When first applying for a Home Equity Line of Credit (HELOC), the lender will do a “hard credit inquiry” and use your credit information to determine your level of risk and if you qualify for the loan. A hard credit inquiry will cause a small temporary drop in your credit.
If you are approved and receive a home equity line of credit, the amount of credit available, the balance, and your payment history will become part of your credit reports.
Late payment and non-payment is always reported to the credit bureaus by the lender, which will result in a reduced credit score. On the other hand, on-time monthly payments will boost your credit score.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easier.
Call 866.287.6225 today to schedule a no-obligation consultation with one of our experienced HELOC representatives to learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products.
As a full-service financial institution, we look forward to helping you with all of your banking needs.
Does opening a HELOC affect credit score? Read on to learn more!
Get Started on Your Home Equity Line of Credit (HELOC)
What Is A HELOC?
A Home Equity Line of Credit (HELOC) is provided by a lender, has a credit limit, a variable interest rate, and is secured by the equity in a home. A HELOC is considered “revolving” credit, which lets the borrower withdraw money repeatedly up to an assigned credit limit. As the borrowed amount is paid off monthly, the account is replenished.
Credit cards are another type of revolving credit, but these come with high interest rates that make it costly to borrow large sums of money.
With lower interest rates than credit cards, HELOCs are very popular with homeowners who need extra cash. Some common uses for a HELOC include: home renovations, buying a second home or investment rental property, paying for college tuition, and paying-off high interest debt.
A HEOC is a “secured loan,” where the borrower’s home is pledged as collateral to secure the loan. Because your home will be used as collateral, if you default on the loan, the lender can take possession of your home.
To learn more, read “What is a HELOC?”
HELOC Eligibility Requirements
Each lender will have a unique set of HELOC eligibility and qualification requirements for borrowers. These requirements can include the following:
Equity In Your Home. Equity is the amount of the home you own (not including the amount owed on your mortgage). HELOC eligibility typically requires that the homeowner have 15-20% equity.
Good Repayment History. Your credit reports include you credit history, which is a record of loan and debt repayment.
Good Credit Score
. Many lenders have a HELOC credit score requirement in the 660-680 range.
Have Adequate Income. All lenders will ask to see proof of employment and proof of income. Income will be used to calculate the borrower’s debt-to-income ratio (DTI).
Learn more about
HELOC requirements here.
How Credit Scoring Works
As you pay off debts, including credit cards and loans, these payments are reported to the three major credit bureaus: Experian, TransUnion, and Equifax. The credit bureaus create a credit report for every individual who has ever applied for credit and/or taken out a loan.
FICO Scores are calculated using many different pieces of credit data in your credit report and each. This data is grouped into five categories:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
How Applying For A HELOC Affects Your Credit Score
Many people ask, “Does applying for a home equity line of credit affect my credit score?” When it comes to credit scoring, each of the five factors can have an effect, with some adding to your score and others detracting, depending on your overall credit history.
Because a HELOC is revolving credit, like credit cards (including retail and gas cards) this loan won’t generally affect your credit mix, which makes up just 10% of your total credit score.
However, applying for a HELOC will require a "hard inquiry" by the lender, which typically lowers your credit for a short period of time. FICO Scores only consider inquiries made during the 12 months prior to the time the Score is calculated, so you should see an eventual increase in credit score.
Making on-time monthly loan payments will help your credit score, and you may see a credit score increase if you don’t utilize the entire loan limit available to you.
How Does A HELOC Compare To A Home Equity Loan Or Cash-Out Refinance?
HELOC: The most distinguishing characteristic of a HELOC is that it is a line of credit. A line of credit allows you to draw from it any amount you need. You’ll pay interest only on the amount you borrow, not on the full credit line. Interest is paid at a variable rate during a draw period of typically 10 years. After that, the interest rate may adjust to a fixed rate and monthly payments will then include both principal and interest on the outstanding balance.
Home Equity Loan: A home equity loan differs from a HELOC in how the funds are disbursed and the interest rate. A home equity loan provides funds in a lump sum and the interest rate is fixed. Like a HELOC, the amount of the loan given by a lender is based on the borrower’s home equity, LVT, DTI, and credit score. Often referred to as a “second mortgage,” a home equity loan is a big financial responsibility. Monthly loan payments will include both principal and interest, whether you actually use the funds or not.
Cash-Out Refinance: With mortgage interest rates very low, refinancing your current mortgage to a new mortgage at a lower interest rate could help you lower your monthly payments. Getting cash-out on a refinanced mortgage means borrowing more than what you owe on your current mortgage, paying off that loan, and getting a cash disbursement of the extra funds at closing. You can use your cash-out any way you choose.
Learn more by reading "
HELOC vs. Home Equity Loan” and “
Cash-out Refinance vs. Home Equity Loan”
How Using Or Not Using Your HELOC Can Affect Your Credit Score
According to
Experian, one common misconception about HELOCs is that the balance figures into your credit utilization ratio. But because a HELOC differs from other credit lines in that it is secured by your home,
FICO® (the credit score used most often by lenders) is designed to exclude HELOCs from revolving credit utilization calculations.
Will Closing A HELOC Affect Your Credit Score?
Closing a HELOC shouldn’t have a great impact on your credit score as long as you have paid off the outstanding principal amount and not defaulted on payment.
Is A HELOC Right For You?
When shopping for a HELOC make sure you understand the terms, fees, interest rate, and repayment requirements of the loan you are considering.
When deciding whether or not a HELOC is right for you, think about your income and employment; are they steady? Taking on a new debt burden in addition to your monthly mortgage payment and other financial responsibilities is a big commitment. Acquiring new debt using a HELOC can be risky, as it involves using your house as collateral.
Pros And Cons Of A HELOC
There are many advantages of getting a HELOC, including the following:
Only Pay For What You Spend. With a HELCO you only pay interest on the amount you spend. (A home equity loan charges interest on the full amount of the loan, whether you use it or not.)
No Closing Costs. HELOCs don’t require a closing, so there are no closing costs.
No Fees For Cash Draws. There are no fees for using your line of credit.
Low Interest Rates. All HELOCs start with a low variable interest rate that typically stays in effect for 10 years, which is called the draw period.
Convert To A Fixed-Rate Loan. When the 10-year draw period concludes, a HELOC can be converted to a fixed rate loan. Some lenders will let you convert to a fixed rate before the end of the draw period.
Tax Advantages. According to the
IRS, interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the tax-payer’s main home or second home (qualified residence), and meet other requirements.
Flexible Spending. Use only the amount you need, just like a credit card.
Higher Credit Limit Than Credit Cards. The credit limit amount a borrower can receive through a HELOC is largely determined by the amount of equity the borrower has in their home, credit score, and other factors. However, qualified borrowers with ample equity may be able to get approved for amounts up to $1,000,000.
Disadvantages Of Getting A HELOC
Here are some disadvantages of a home equity line of credit:
Interest Rates May Rise. All HELOCs start with a variable rate and quite often, it is a promotional rate that changes to a higher variable rate after the promotion ends. After the HELOC draw period (usually 10 years), a HELOC will adjust to a fixed rate.
Using Funds For Frivolous Spending. Having easy access to money makes it tempting to overspend or spend the money on luxury purchases that aren’t necessary. Overspending on a HELOC can result in high monthly payments when the rate goes up.
Only Making The Minimal Payment. Making the minimum monthly payments leaves you paying interest on the full amount owed. To save money on interest payments, it’s recommended you repay the full balance or as much as you can each month.
Hidden Fees. Some Lenders, particularly banks, may charge a pre-payment penalty, annual fee, or inactivity fee if you don’t use the loan. Be sure to ask about account fees before you sign for the loan.
Home Value Drops. If the value of your home decreases, that means you’ve lost equity and could owe more than your home is worth. Having a HELOC could increase your debt-to-income ratio, making it more difficult to be approved for other loans or credit.
Set Withdrawal Period. All HELOCs come with a draw period, typically 10 years. This is the amount of time you’ll be allowed to draw from the loan amount. After that, you’ll need to repay the principal amount of the loan.
You Can Damage Your Credit. If you fail to repay the loan, make late payments, or are unable to make your mortgage payments, these events will be reported to the credit bureaus and your credit score will go down.
Loan Collateral. Because a HELOC is secured by the equity in your home (i.e., uses your home as collateral), defaulting can result in the lender foreclosing on your home.
For more details read, "
HELOC Pros and Cons."
When Should You Consider Getting A HELOC?
If you will be using the funds to start a business, pay for a wedding, pay down high interest credit card debt, or increase the value of your home by making home improvements, a HELOC is a great tool to help you achieve your goals.
If you need money to take a vacation or make luxury item purchases, then an
unsecured personal loan would be a safer option.
CU SoCal HELOC
CU SoCal offers an interest-only HELOC, so you pay only the interest due each month, giving you the flexibility to keep payments low during the 10-year draw period of your loan. We offer the choice of either a lump-sum loan or a revolving credit line that can be used over and over again.
Other great HELOC features include:
- Access up to 80% of your home's equity.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- Loan limit up to $250,000.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Apply for a HELOC today!
Get Started on Your Home Equity Line of Credit (HELOC)