How Does Applying for a HELOC Affect Your Credit Score?

Are you looking to make home improvements? Pay for college costs? Or are you just looking to pay down your existing debt? If you have a home equity line of credit or HELOC, you might already have the answer to your problems.

A Lanco FCU home equity line of credit can provide you with a powerful financial tool. However, you do take on some financial risks when you have a HELOC. You may have questions like, ‘Does applying for a HELOC affect credit score ratings?’ or ‘How do you use a HELOC?’

These are the questions we want to answer for you. Once you understand how this incredible financial tool could benefit you, contact us and see if our home equity line of credit offerings are suitable for your situation.

What Is a HELOC?

If you’ve heard of a home equity line of credit, you might know it as a valuable option for homeowners. This loan option is a revolving line of credit you borrow against your home’s equity. You can borrow money based on a percentage of your home’s assessed value minus your remaining mortgage.

This money can be yours to use as you see fit. Unlike home equity loans, which are lump-sum loans, a HELOC functions like revolving credit, similar to a credit card, but typically offers a higher credit limit because it’s secured by your home’s equity. Since a HELOC is essentially a second mortgage on your home, it is important to make timely payments, as your home serves as collateral.

How Does Applying for a HELOC Affect My Credit Score?

Simply applying for a HELOC has a minimal effect on your credit via the credit inquiry that is part of the application process. Applying for multiple credit products in a short time can have a more pronounced impact on your credit. However, how you use and pay off this line of credit will likely have a more impactful and long-lasting effect on your credit score. Most of the major credit score companies use these seven primary factors to monitor and calculate your score:

• Payment history
• Current unpaid debt
• The types and number of loans that you have (often referred to as credit mix)
• The length of your loan account history
• Your credit utilization ratio (percent of available credit used)
• New credit activities (recent inquiries or newly opened accounts)
• If you have been sent to collections, been foreclosed, or declared bankruptcy

So, while simply applying for this line of credit will affect only one of these factors, responsible use of this line of credit may help you build your credit score by diversifying your credit mix, adding history of on-time payments, and keeping your credit utilization ratio at a low level.

Note that if you are paying off or consolidating loans through a HELOC, you will still need to make timely payments on your line of credit while utilizing this credit and managing your finances. It’s also important to remember that, while there are many potential benefits gained by having a line of credit, irresponsible use such as late payments may negatively affect your credit score.

Overall, a HELOC gives you a flexible tool to manage key factors that influence your credit score.

What Is the HELOC Draw Period?

A typical home equity line of credit is organized around a draw period and a repayment period. The draw period is usually between five and ten years long and is when you will be actively using the line of credit. During this time, you can withdraw as much or as little money as you need—up to the credit limit. During the draw period, many lenders allow interest-only payments, meaning your principal loan amount can stay stable throughout the draw period.

Once the draw period ends, you are in the repayment period, during which you will repay the total amount of the HELOC principal and interest. The repayment period is typically longer than the draw period, between 10 and 20 years. The interest rate is often fixed at the end of this period so you can make equal payments throughout the repayment. However, some interest rates are variable, depending on the terms of the HELOC. Check with your lender for details.

How Much Value Is in a HELOC?

 

You might want to pursue a home equity line of credit from a credit union, but you want to know you’re getting the most out of your application. A home equity line of credit allows you to borrow against your home’s equity—the difference between its assessed value and what is left of your mortgage. Depending on your credit score and debt-to-income ratio, lenders may let you borrow up to 60 to 90% of this amount.

These lenders might trust in your home value, but demonstrating low debt levels or strong debt management skills can help you secure a better home equity line of credit (HELOC). Similar to a credit card, you will accrue interest on the amount of credit you use. This interest rate typically depends on market conditions and your credit score. Therefore, it is important to understand the specific terms of a HELOC.

What Are the Pros and Cons of a HELOC?

There are many reasons to seek out a home equity line of credit, and we want you to have enough information to make a sound decision. Some of the most important considerations include:

Suppose you leverage this line of credit well. In that case, a HELOC affects your credit by providing a tool to reduce other debt loads, perform home improvements to get a return on this credit, and get lower interest rates than credit cards or other lines of credit.

However, having several missed payments may put you at risk of the lender foreclosing on your home, which can then hurt your credit score. Even if you make timely payments, if housing prices drop and the outstanding HELOC balance exceeds the home’s value, you may find yourself “underwater.” This risk—when you owe more on your home than the value of your home—could lead to financial hardship and offer limited options for selling or refinancing.

If a Home Equity Line of Credit is Right for You, Come to Lanco FCU!

Now that you know how applying for a HELOC can affect your credit, you know that HELOC loans can be desirable alternatives to other credit lines. These lines of credit provide ample funding, make it easy to access funds, and can help you manage other debts. A HELOC can be a more flexible option than a home equity loan, allowing you to borrow smaller amounts as needed instead of taking on a large debt upfront.

If you are wondering how a HELOC could benefit your credit, contact us—a trusted local credit union in Lancaster, Pennsylvania! From personal loans to debt consolidation, we have knowledgeable and caring staff to ensure you are more confident and capable when pursuing a HELOC.