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Pros and Cons of a Stated Income HELOC Loan

Home equity loans allow homeowners to borrow money using their home equity as collateral. If you bought a home for $50,000, for example, and only owe $25,000 on the mortgage, you might be able to establish a revolving line of credit for the equity you have already put into the home. This would give you up to $25,000 to draw from. These types of loans are often used to fund home improvements, consolidate credit card debt, or fund vacations.

When it comes to home equity loans , there are a number of options available to choose from; one of the most popular choices is a stated income home equity line of credit (HELOC). This type of HELOC is usually for a significant amount of money and is used almost like a credit card. The money that you are approved for will be placed in a certain account connected to a card issued to you by your bank or other financial institution which you can use it however you see fit. Before you decide that a stated income HELOC is the way to go, however, you should be aware of several pros and cons that exist when committing to this type of loan.

Proof of Income

With a stated income HELOC, a borrower is not required to provide proof of their income. Instead, they simply fill out their income amount on the paperwork – which tends to be minimal – and wait for the account to be set up. This is a good option to consider if you're just beginning a new job or are self-employed and don't necessarily have a stable source of income. This offers homeowners a lot of leeway when estimating the income with which they want to apply.

Ease of Use

In contrast with other home equity loans that give you all of your money in a single deposit and then require that you begin paying back the loan with fixed monthly payments, a stated income HELOC allows you to use as much or as little as your needs dictate, and payments will vary depending on how much of the line of credit you have used. Additionally, the interest rate on a stated income HELOC tends to be lower than credit cards because you're using your home as collateral. Your lender is unlikely to lose their investment if you default on the loan, in other words, so they are more likely to offer low overall rates as well as very low introductory rates.

Interest Rates

While it's true that the interest rates offered by a stated income HELOC tend to be lower than those found with traditional credit cards, they can still be troublesome. This is particularly true after your introductory interest rate period is over and the lender is free to increase your interest rate to its maximum possible rate. This means that you could potentially see your interest rate soar from 5% to 20%, depending upon your specific agreement with the lender. It's a good idea to carefully read your paperwork and determine just how high your interest rate could potentially rise. Would you be able to pay the monthly amount if the rates were that high? If not, you might consider looking at another form of home equity loan.

High Collateral

A Stated income HELOC requires that you use your house as collateral in the case of financial trouble. Additionally, the line of credit that you utilize is considered secure debt, which means that it cannot be discharged in a bankruptcy. While no one ever starts out their financial journey anticipating the need to file for bankruptcy, circumstances can change very quickly. If you found yourself in financial hardship and became unable to pay on your line of credit, the lender could potentially seize your home in an attempt to avoid losing money. This is one of the reasons why using a stated income HELOC to consolidate debt isn't necessarily recommended: credit card debt is unsecured, and can be discharged should you find yourself filing for bankruptcy. As an added bonus, you probably won't lose your home in the process.

With their flexibility and ease of use, a stated incomes HELOC loan is a favorite choice among many borrowers. It is important to keep in mind, however, that the risks of this type of home equity loan are greater than those found in other types. Consider your situation carefully before entering into an agreement of any kind.