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What are Home Equity Line of Credit Loans?

Can your home's value be turned into cash that you can access when you need it? It can if you qualify for a Home Equity Line of Credit (HELOC) loan.

Home Equity Line of Credit Overview

A HELOC is a type of home loan – usually with an adjustable rate – that gives the homeowner access to a line of credit determined by the lender from the value of the home. While a HELOC is commonly referred to as a second mortgage, it can be issued as a primary loan.

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Home Equity Line of Credit | HELOC | house models and calculatorA HELOC loan lets you borrow against your home's equity – often 80% of the home’s value minus the amount owed on the primary mortgage.

Think of a HELOC like a credit card in the sense that you have a line of credit that you can access for your expenditures. You will have to pay back what you owe with interest, but you can come back and withdraw as much as you need with separate transactions. It is ultimately up to you how much you want to withdraw from your line of credit (or if you want to withdraw any funds at all).

A HELOC has a draw period and a repayment period. The draw period can vary but is often between 5-10 years. During the draw period, you can borrow from the credit line and minimum payments are often interest only, but you can also make payments on the principal loan balance as well.

During the repayment period (which also can vary, but is often 10-20 years), you can no longer borrow against the credit line. Instead, it's time to pay back what you owe back with monthly payments consisting of the principal and the interest of the loan.

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Home Equity Line of Credit Benefits

Most borrowers get a HELOC for a major home repair or remodeling project. If the loan is used for home improvements and repair, you can write the interest off your taxes. (Consult a trusted tax advisor or tax professional for financial or tax advice.)

With the line of credit aspect of a HELOC, you can withdraw only the funds you need versus getting one lump sum of cash in a typical loan situation, which may take longer to pay off with the added funds and additional interest.

A HELOC could help you pay for:

  • Major indoor and/or outdoor home improvements/repairs, such as a new kitchen, bathroom, patio, deck, etc.
  • Consolidate your debt/improve your debt-to-income ratio
  • Auto loan
  • Student loans
  • Medical bills
  • Wedding
  • Vacation
  • Elderly care
  • Investment property
  • College
  • Boost your credit score
  • Get a lower interest rate
  • Improve your financial situation
  • Get potential tax deductions (be sure to consult a tax professional)
  • Have simple interest instead of compound credit card interest

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Home Equity Line of Credit Requirements

What is needed for a HELOC loan?

First and foremost, you need to have enough equity in your home to qualify for a HELOC loan.

For example, if your home is worth $300,000 and you owe $100,000, a lender will typically let you access up to 80% of the home’s value (minus your current mortgage), which in this example would be $240,000. When you subtract the current mortgage, you arrive at a maximum HELOC amount of $140,000 to access as credit.

In addition, credit history, income and other debts/financial obligations will be considered for loan eligibility. An appraisal of your home may be required.

Home Equity Line of Credit Loan Options

Fixed-rate HELOC: The interest rate will not change through the life of the loan allowing you to lock in a stable rate without worrying that it will go up. Both the interest and principal must be paid off during the term of the fixed rate loan.

Adjustable-rate HELOC: The interest rate can fluctuate monthly, depending on the market industry rate. This loan rate is initially lower than the fixed-rate HELOC. You pay only interest during the draw period (usually 10 years). After this period, you are required to pay the interest and the principal.

Hybrid HELOC: This option allows you to convert a portion or all of the loan from a variable into a fixed-rate loan without having to reapply for the loan. A term would need to be chosen for paying back the fixed-rate portion.

HELOC Loan Rates

Is a HELOC loan right for you? Contact us today and we can discuss your situation and find the right loan to fit your financial needs.

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