Without even attempting to assess the real value of my home, a bank employee in some far-away location rejected my application within minutes, claiming the equity in my home fell just shy of 20 percent – the magic number most financial institutions use to decide whether to issue you a HELOC.
The manager of my bank branch pulled me into his office and told me to go directly to my credit union and apply for a personal line of credit.
My credit union immediately approved my application, and I walked out with a stash of cash to tap when emergencies arise — and with an education about personal lines of credit.
Millions still lack equity
While the housing market is far stronger than it was when I applied for a HELOC, 7 million homes with a mortgage were still underwater at the end of June, according to CoreLogic, which analyzes data on real estate trends. (“Underwater” means the owner owes more on the home than it’s worth.) At the same time, more than 10 million additional homes had less than 20 percent equity.
Those underwater homes and “under-equitied” homes together made up more than one-third of all homes with a mortgage as of June.
That can make it tough when a financial crunch or emergency arises — and your emergency fund is nonexistent or is already tapped out – because you typically need to have at least 20 percent equity to qualify for a HELOC. So if your home is worth $100,000 and your mortgage is more than $80,000, you may find a HELOC hard to get.
In that situation, a personal line of credit can be a welcome alternative.
What is a personal line of credit?
A personal line of credit is similar to a HELOC, in that you have an ongoing line of credit that you can tap into as needed.
You might apply for a $10,000 line of credit, but only need $3,000 for an emergency home repair this week. You take out that $3,000, which you have to pay back in monthly installments, and pay interest only on the amount you borrowed.
If you need to make a $2,000 car repair next month, you can borrow that money as well, giving you $5,000 to pay back, and $5,000 still in your account.
Depending on your bank or credit union, you may be able to access your cash by writing checks, using an ATM card, making an Internet transfer or making a withdrawal at your financial institution.
More banks and credit unions are now offering personal lines of credit, and if you’re a reliable customer with a good credit history and a good credit score, you might even receive an offer in the mail.
It might be easier to get a personal line of credit if you already have a relationship with a financial institution, but plenty of banks and credit unions now offer them, including Wells Fargo and Citibank.
Like any loan product, the interest rate you pay will be based on your credit history and credit score. Your financial institution may also verify your employment and income.
Pros and cons
The downside to a personal line of credit is that the interest rate is typically higher than that for a HELOC. And unlike a HELOC, the interest is not tax-deductible.
On the other hand, the interest rate is usually far lower than a credit card cash advance, and unless you have a credit card with a very low interest rate, a personal line of credit will typically cost you less than carrying a balance on your credit card.
If a personal line of credit is not available, Money Talks News founder Stacy Johnson explains some other smart ways to borrow money, as well as their drawbacks, in the video below. (Note: None of these trump having a healthy emergency fund.)
More articles on mortgages and loans can be found at James Clooney