What's Better for You: a Home Equity Line of Credit or an Equity Sharing Agreement?
If you're a homeowner, you may be able to tap into your home equity to get the funds you need for a major project or purchase. But what's the best way to do that? Should you get a home equity line of credit (HELOC), or enter into an equity sharing agreement?
Here are some things to consider to help you decide which is right for you:
Your financial goals: What are you hoping to accomplish by tapping into your home equity? If you're looking for a relatively small amount of money for a one-time project, a HELOC may be the way to go. But if you're looking for a larger sum of money that you'll need over a longer period of time, an equity sharing agreement may be a better option.
Your creditworthiness: In order to qualify for a HELOC, you'll need to have good credit. If your credit score is on the lower end, you may still be able to qualify for an equity sharing agreement.
Your income: Your income will play a role in determining how much money you can qualify for with a HELOC. With an equity sharing agreement, your income isn't as much of a factor.
Your debt-to-income ratio: This is one of the most important factors lenders look at when considering a HELOC. Your debt-to-income ratio is your monthly debt payments divided by your monthly income. Lenders typically want to see a debt-to-income ratio of 43% or less. So if your monthly debt payments are $500 and your monthly income is $1,500, your debt-to-income ratio would be 33%.
Your home's value: In order to get a HELOC, your home will need to have enough equity built up. Equity is the portion of your home's value that you own outright. So if your home is worth $200,000 and you still owe $150,000 on your mortgage, you have $50,000 in equity. To qualify for a HELOC, you'll typically need at least 20% equity in your home.
Now that you know more about HELOCs and equity sharing agreements, you can decide which is right for you. If you're not sure, speak to a financial advisor or lender to get expert advice.