Will opening a HELOC affect my credit score?
A HELOC is a Home Equity Line of Credit, which is different than a traditional mortgage because it’s an open credit line available for homeowners to take out the amount of money you need. On a credit report HELOCs are usually listed as revolving credit like a credit card, not a second mortgage. Too many open lines of credit can have a negative affect and a HELOC could potentially bring down your credit score.
With a HELOC, the borrower decides how much equity from their home to use. For example, say you have $100,000 in credit. The bank will set up a revolving account, so you can take out as little or as much of that $100,000 you need and you can use it for any expenses you wish. Because they have a minimum monthly payment and a limit, a HELOC can directly affect your credit score since it looks like a credit card to credit agencies. However, it’s important to manage the amount of credit you have since a HELOC will have a much larger balance than a typical credit card. It may also be a good idea to pay off your other credit card balances with the HELOC, so you only have one balance to manage. If you have too much credit debt and too many lines of credit, your credit score is affected.
Another way opening a HELOC can affect your credit score is from the fluctuating payments. Since a HELOC has a variable interest rate, payments can increase when interest rates rise. This can make it challenging to budget when you don’t know what your payments will be in the future. If your payments increase too much you may want to consider refinancing your HELOC.
Does a HELOC hurt my credit score?
Using all the available credit on your HELOC may have a negative effect and hurt your credit score as it’s an indicator of high risk even if you make payments on time. By using all your available credit, you don’t have room for unexpected expenses like a medical issue or a leaky roof or a broken car. You don’t want to max out your credit cards or a HELOC and have no emergency source of funds. On the other hand, if you use your credit strategically, a HELOC can affect your credit score positively and boost your financial situation. Plus, as you pay down your HELOC, your credit score should improve.
Will closing a HELOC affect my credit score?
Part of your credit score is determined by your credit utilization, which is how much credit you are using. Closing a HELOC decreases how much credit you have, which can hurt your overall credit score. However, if you have other credit lines besides a HELOC like credit cards, then closing it should have minimal effect on your credit score. Another reason to close the line of credit if you don’t need to take any more money out or if you pay off the balance is that it will close out the lien on your home that a HELOC puts in place as collateral. If you want to sell your home and purchase another, then you would first need to close out the HELOC.
Learn about your options and the differences and benefits between a cash out refinance vs. HELOC or home equity loan. Contact our experienced loan advisors today and let Freedom Mortgage help you find the best solution to get cash out of your home equity.