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Home Equity Line of Credit (HELOC)

What is a HELOC?

Homeownership is a big part of the American Dream for many people. If you are already a homeowner, you know that what you have is not just a house. It is one of the most valuable assets you can have. If you own a home and need cash, then a Home Equity Line of Credit may be right for you.

A Home Equity Line of Credit (HELOC) is a type of credit line that is based on the value of your home. The main difference is, in the case of a HELOC, your home is used as collateral for the money. Since a HELOC is backed by your home, it is important to take time to consider whether it is the right choice for your current circumstances.

How a HELOC Works

Home Equity Line of Credit | HELOC | house models and calculator

A HELOC allows you to take advantage of your home’s equity. Your equity is the value of the home minus the amount you owe on the primary mortgage. A HELOC works like a credit card in the sense that you have a line of credit that you can access for your financial needs. The amount of credit you are offered is decided by your lender based on the current value of your home and how much you owe on your current mortgage.

The HELOC acts as a revolving line of credit. This means that your lender will establish a credit limit that you will be able to borrow from over and over. You can borrow the whole amount up to the credit limit, or you can borrow various parts of the amount. As you pay off what you have borrowed, that amount continues to be available to you, minus whatever you still owe.

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.

With 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 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. This is when you start repaying what you owe with monthly payments consisting of the principal and the interest of the loan.

Benefits of a HELOC Loan

HELOCs give you access to the equity that is otherwise locked into your home.

Here are some of the benefits of HELOC loans.

  • Lower interest rates than personal loans or credit cards
  • Can be used for debt consolidation
  • Can be used for major home renovations, repairs, and improvements
  • Lower or no origination fees
  • Can be used for investing in real estate
  • No restrictions for use
  • Higher credit limits

What Can You Do With a HELOC?

A HELOC is designed to let you convert the equity in your home to cash that you can use however you want. HELOCs are versatile credit lines, meaning you can use them in a variety of ways.

Here are some things you can use your HELOC for.

  • Finance home improvements: This can include repairs, renovations, and upgrades for both indoor and outdoor projects. Using a HELOC to increase the value of your home can be particularly beneficial if you have long-term projects in mind.
  • Consolidate your debt/improve your debt-to-income ratio: You can use a HELOC to consolidate debts like credit cards at a lower interest rate or to pay off other loans. These can include auto loans, student loans, and medical bills.
  • Pay for major life events: Like a wedding or honeymoon
  • Pay for a large expense
  • Pay for personal or familial needs: Like elderly care, childcare, or school
  • Pay for continuing education: Like college tuition or trade school
  • Boost your credit score
  • Lower your current interest rate
  • Improve your overall financial situation
  • Get potential tax deductions (be sure to consult a tax professional)

Qualifying for a HELOC

The requirements to qualify for a HELOC loan vary from lender to lender. Make sure to check with your mortgage lender for their specific qualifications for approval.

Here are some general requirements.

  • A minimum of 15-20% equity in your home: Your home equity is the current value of your house minus whatever amount you still owe on the mortgage.
  • A minimum credit score of 620: While the minimum credit score requirement for a HELOC loan is 620, a higher credit score can impact your loan. Many lenders prefer a credit score of 700. A higher credit score can often get you lower interest rates on your loan.
  • A low debt-to-income ratio: Most lenders will prefer your DTI to be no greater than 43%. However, some will go as high as 50%. Your mortgage lender will calculate your DTI based on your total income. This includes your salary plus any extra income you may get from rental properties, bonuses, etc. It is then compared to your total debt, including your future total monthly house payment.
  • Steady and sufficient income: Each lender has different income requirements. However, they will require proof of consistent income such pay stubs or W-2s. The amount of income you have can also determine the amount of the loan that you qualify for.
  • Consistent payment history: A lender will want evidence of a borrower's dependability.
  • Most lenders also require homeowner's insurance

How to Apply for a HELOC Loan

Before you apply for a HELOC loan, you want to consider all the options available to you for accessing the equity in your home. A HELOC loan can be a helpful resource if you already know the amount of equity you have in your home and know the amount of money you want to borrow.

Next, make sure you meet the applicable qualifications listed above.

Once you have decided a HELOC is right for you and that you meet the qualifications, then you can reach out to a mortgage lender. New American Funding has many options for your HELOC. The company’s loan officers will be happy to answer any of your questions and help through the process of applying for a HELOC.

Working through the application process will be a similar experience to when you applied for your initial mortgage. It will require much of the same documentation including personal identifying information and proof of income.

Apply for a HELOC

How to Determine Your Home Equity Line of Credit

Multiply: (Your home’s value) x (your lender’s LTV percentage) = maximum amount of borrowable equity

Subtract: (Maximum amount of borrowable equity) – (what you currently owe on your mortgage) = your HELOC credit limit

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

HELOC Loan Rates

HELOC rates depend upon several factors. These include the borrower’s credit score and how much equity they have in their home.

Types of HELOCs

Fixed-rate HELOC: The interest rate will not change through the life of the loan. This lets you 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 rise or fall 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 Alternatives

Home Equity Loan: A Home Equity loan is like a HELOC in that it lets you borrow money using the equity of your home. Unlike a HELOC, a Home Equity loan is one lump sum that is paid back in fixed amounts. You have a set amount of time to pay back the loan and it is usually a fixed rate.

Here are some benefits of a Home Equity loan.

  • Stable monthly payments
  • Low interest rates
  • Longer terms

Cash-Out Refinance:  Cash-Out Refinance lets you access the equity you have built up in your home. You change your current mortgage to a new one. The new mortgage could have different terms than the original and the amount is larger than what you currently owe. The excess funds left over after paying off your old loan’s outstanding balance and closing costs is then paid out to you in cash at closing.

Here are some benefits of Cash-Out Refinancing.

  • One lump sum to use however you want
  • May have lower interest rates
  • May be able to shorten your loan term

Learn more about Cash-Out Refinancing vs a HELOC to find out which one is right for you.

New American Funding provides you with more options for your HELOC than many other lenders. Our HELOCs may enable you access more of the equity in your home than other lenders.

Unlike many other lenders, our HELOCs are available not only for owner-occupied homes, but for second homes as well.

Interested in applying for a HELOC? Contact us today and we can discuss your situation and find the right loan to fit your financial needs. Use our mortgage calculator to find your general mortgage calculation and answer your questions about payments.

Can you pay off a HELOC early?

You can pay off a HELOC early. However, some lenders charge prepayment penalties. Make sure you check the terms and conditions of your individual agreement with your mortgage lender.

Do you need an appraisal for a HELOC?

Some lenders do require an appraisal of your home for you to qualify for a HELOC. Make sure to check with your individual mortgage lender.

How long does it take to get a HELOC?

It can take anywhere between two weeks to two months to get a HELOC. 

What are the steps in getting a HELOC?

  1. Consider the loan options and decide which one is right for your individual circumstances
  2. Determine the amount of equity you have in your home
  3. Decide on the loan amount you need
  4. Make sure you meet the qualifications for applying for a HELOC
  5. Find your mortgage lender
  6. Locate and gather the documents required by your lender
  7. Fill out the HELOC application paperwork with your lender
  8. Close on your loan

Can I use my HELOC for a Second Home?

Some lenders allow you to use a HELOC for a second home. Whether or not you can use a HELOC for a second home depends on the amount of equity you have in your home. It also depends on the individual restrictions and requirements of your lender. Check with your lender to find out if you can use your HELOC for a second home.  

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