When a homeowner is ready to make improvements on their home, they might seek financing to help them bare the expense. Home equity financing is drawn against the value of your home, it requires a credit check and appraisal to determine the loan amount and interest rate.

Two types of home equity financing

Home equity line of credit – This is just a line of credit that the borrower can draw from as needed. Like credit cards, the payments will vary based on how much you have borrowed from the line.

Home equity loan – this is a lump sum loan; the borrower has fixed installment payments every month whether they’re using the financing or not.

Since lenders use the equity in your home to authorize the financing, home equity financing can be risky because it requires you use your home as collateral.

Home equity lines of credit can fluctuate credit scores due to the category they are placed in. After reviewing thousands of credit reports, pulled by banks that are evaluating credit for a potential borrower who is applying for a mortgage or a home equity line, I have found that 90% of the time Heloc’s are listed in a revolving credit category. This means if balances are high or at the limit scores plummet. The other 10% of home equity lines of credit are listed in the mortgage category which means they have much less of an affect on credit scores.

There are some credit experts that claim home equity lines of credit do not affect credit scores and are considered mortgage credit. This is not what I have found.

When a bank pulls credit scores they usually have a summary of debt owed and the categories this debt falls into. 90% of the time the Heloc’s are added to the revolving credit category which affirms the fact that they are decreasing credit scores when balances are high.

If a consumer is thinking of applying for a loan they must consider how their balances on revolving credit are affecting scores before they make the application. In today’s credit restrictive loan environment it is much harder to be approved for a loan. Even the act of having a lender review your credit can reduce it. Consumers must prepare before they make applications insuring they have the best opportunity and chance of approval.