Sponsored: How to get a home equity line of credit

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The warm weather is finally here to stay! If you’re anything like me, that means more projects around the house. Just when we think we’re done for a while something comes up and we need to remodel the basement or an upstairs bedroom. Depending on how large your project is, you may want to think about getting a home equity line of credit (HELOC). It’s a great way to add value to your home.

When you’re ready to apply for a HELOC, it’s useful to know what your financial institution requires for approval. Every lender is different, but here are a few things to consider:

Equity
Estimate your home’s equity by subtracting the amount you still owe on your mortgage from the current market value of your home. For example: if you owe $200,000 and your home’s appraised value is $350,000, your home equity is $150,000.

Combined loan-to-value ratio
Some lenders may limit the amount of money you can borrow based on your combined loan-to-value ratio (CLTV). Estimate your CLTV ratio by adding your mortgage and any other secured loan balances on the property together. Divide this total by the current appraised value of your home. Convert that number to a percentage to get your CLTV. Most lenders require a CLTV ratio below 90%.

Debt-to-income ratio
Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward paying off debt. To figure this number, add up all your monthly debt payments and divide it by your total monthly gross income, then convert it to a percentage. Most lenders are looking for a DTI of 47% or less.

Credit score
Although your home equity is weighted more heavily than your credit score when applying for a HELOC, a good or excellent score can put you over the top. Plus, the better your credit score, the better your interest rate. Shoot for a score that is 645 or higher.

Once you have a HELOC, keep these tips in mind:

  • Don’t withdraw more than you need
  • Read the fine print and be aware of upfront costs, closing costs or annual fees
  • Make payments on the principal during the draw period to reduce interest charges
  • Make a repayment plan and start working it immediately
  • Understand all the terms of your HELOC and follow up with your lender on any questions
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