If you have been exploring ways to borrow money, you may have come across the acronym HELOC, but you may be unsure of what exactly that is and how it might benefit you.
What is a HELOC?
HELOC stands for home equity line of credit. It is a way of borrowing against the equity in your home and most lenders will allow you to borrow up to 80% of that equity. Unlike other times of home equity borrowing such as second mortgages or refinancing, a HELOC is actually a revolving line of credit and it works in a way that is similar to a credit card.
Once you get an approved borrowing limit, you may borrow payback and re-borrow as often as you like as long as you do not exceed your borrowing limit at any given time. You will have payment schedules to pay back what you have borrowed, and you only pay interest on the amount that you have borrowed.
Reasons for getting a HELOC
There are many reasons why you might choose to borrow using a HELOC rather than getting another type of loan. Some of these reasons are as follows:
Low interest rates
Because a HELOC is a secure loan that uses your home as collateral, the interest rates tend to be much lower. They are typically lower than the rates on personal lines of credit and they are most certainly lower than the rates on credit cards.
Easy to quality for
If you don’t have great credit, than getting approved for an unsecured loan may be difficult. Since HELOCs are based on your home equity, they are generally easier to get approved for.
Borrowing power now and in the future.
If you have a one-time project or purchase you’d like to fund than a lump sum loan such as a second mortgage may serve your needs. But if you are looking for a loan that will give you borrowing power in the future, then a HELOC may be more appropriate.
Because a HELOC is a revolving loan, you may use it as often as you wish as long as you continue to make the payments.
HELOC Minimum Equity Requirements
Easily unlock your home investment value with a Home Equity Line of Credit (HELOC). With this secure line of credit you can get better interest rates, reasonable terms, smaller or no repayment penalties, and gain access to large amounts of money anytime you need it. But first you’ll need to meet the minimum equity requirements.
Minimum Equity Requirements
A HELOC may be offered to you if you have a bare minimum of 20 percent equity in your home already. Although this can vary a little based on the lender you choose, the 20 percent minimum requirement is pretty strict throughout the industry, as it helps to reduce the risk in the eyes of lenders. So, the more home equity you have, the better your interest rate will be on your Home Equity Line of Credit.
With the set minimum there must also be a maximum too. Most lenders allow HELOC up to 80 percent of your home’s equity value, however there are brokers and lenders out there that can get you up to 95 percent, and AKAL Mortgages is one of them.
Other HELOC Requirements
There are a few other HELOC requirements you also need to be aware of, these include:
- A financial background check on both the homeowner and any co-applicants which assesses your repayment ability
- An assessment of your credit history will be done to determine your interest rate and get your HELOC approved
- A risk assessment will also be completed when your lender reviews your debt-to-income ratio
- A home appraisal will be done, and your lender will verify of all owner documents to determine your mortgage position on your home
- Ability to prove steady income and repayment capabilities
- If self-employed, you’ll need to be able to provide ample proof regarding job stability and repayment abilities
- Provide any/all documentation for any second mortgages, as well as the repayment history
These are all of the minimum requirements you’ll need to meet in order to qualify for a Home Equity Line of Credit. These requirements have been set in order to lower the risk that both borrowers and lenders face. Since there is so much investment put into your home, it would be a shame to lose it. Wise financial planning can help to ensure that this doesn’t happen. When using funds from your HELOC, consider the return-on-investment on your purchases, it should generally be higher than the interest rate on your line of line of credit.
Have questions about a HELOC? Our mortgage team is here to assist you, get in touch today.
Top Benefits of Using a Home Equity Line of Credit (HELOC)
For many homeowners, the equity built up in their home can become a valuable financial asset. A Home Equity Line of Credit allows home owners to tap into that asset, providing access to funds for various purposes, from home renovations to debt consolidation and beyond. With flexible borrowing terms and lower interest rates compared to many other types of credit, a HELOC can offer significant financial advantages.
In this blog, we’ll explore what a HELOC is, how it works, and the top benefits of using one to meet your financial needs.
What is a Home Equity Line of Credit (HELOC)?
You can borrow against the equity in your house with a Home Equity Line of Credit, which is a revolving line of credit. The difference between the current market value of your house and the amount you owe on your mortgage is known as equity. Generally speaking, a HELOC functions similarly to a credit card in that you are granted a specific credit limit and are only required to pay interest on the amount borrowed.
The HELOC process usually involves two phases:
- Draw Period – You can take out a loan from the line of credit during this time. You can use the money for a many purposes during draw periods, which normally last five to ten years.
- Repayment Period – You are no longer able to borrow from the HELOC when the draw period is over. The repayment period starts and can go on for up to 20 years. Both principal and interest must be repaid during this period.
Now that we’ve covered the basics of a HELOC let’s dive into the primary benefits of using this financial tool.
1. Access to Substantial Credit Limits
One of the main advantages of a HELOC is that it gives homeowners access to a lot of credit, frequently much more than they might get from credit cards or personal loans. Higher credit limits are most likely to be offered by lenders because a home equity loan is secured by your house. Your creditworthiness, the value of your house, and the amount of your outstanding mortgage all affect how much you can borrow.
This access to significant credit is beneficial for major expenses, such as:
- Home renovations: Many homeowners use HELOCs to finance home improvement projects that can increase the value of their property.
- Education expenses: A HELOC can be a useful resource for funding college tuition or other educational costs.
- Debt consolidation: With the potential for lower interest rates, HELOCs are an attractive option for consolidating high-interest debts.
2. Lower Interest Rates Compared to Other Loan Types
Because a HELOC is a secured loan (using your home as collateral), lenders often offer lower interest rates are compare to unsecured forms of credit, like personal loans or credit cards. For homeowners with good credit, this can translate into substantial savings over time, particularly if you’re borrowing for a large project or using the funds over several years.
HELOCs typically have dynamic interest rates, which means the rate can fluctuate over period time based on market conditions. However, many lenders offer the option to lock in a fixed rate on a portion of the HELOC balance, providing some protection from rising rates. The less interest rates associated with HELOCs make them especially attractive for:
- Long-term financing, such as major home renovations
- Paying off high-interest debts like credit cards
- Financing large purchases that would otherwise require expensive personal loans
3. Flexible Borrowing and Repayment Terms
A major advantage of a HELOC over other loan types is the flexibility it provides. During the draw period, you can borrow funds when needed, up to your approved credit limit. This makes HELOCs ideal for projects or expenses that occur over time, such as home renovations, where costs might fluctuate.
Additionally, during the draw period, you are typically only required to make interest payments on the amount you’ve borrowed. This can help keep monthly payments low, especially if you only need a small portion of your available credit. However, if you wish to begin payback the principal during the draw period, you have the option to do so, potentially reducing the balance faster.
Once the draw period ends, the repayment phase begins. At this stage, you’ll be required to make both principal and interest payments, similar to a traditional loan. The flexibility to draw funds as needed and pay back over time provides a level of convenience that other loans, such as a home equity loan (which gives you a lump sum), may not offer.
4. Potential Tax Benefits
The possibility of tax savings is another advantage of a HELOC that is frequently disregarded. Interest paid in a home equity loan (HELOC) can often be tax deductible, especially if the money is used for renovations or house upgrades. This might offer an extra financial incentive to use a HELOC for home improvement projects like kitchen remodels, room additions, or energy-saving enhancements.
However, it’s important to consult with a tax advisor to understand the specific tax implications based on your situation, as tax laws regarding home equity loan interest deductions have changed in recent years.
5. Improve Your Home’s Value
A HELOC is a popular option for funding home renovations because it allows you to invest in your home and increase its market value. Whether you’re updating outdated features, adding square footage, or making repairs, home improvements can enhance your home’s appeal to potential buyers and may lead to a good selling price in the future.
By reinvesting in your home using a HELOC, you may also be increasing your own equity over time, essentially leveraging one financial asset (your existing home equity) to build an even larger one. Just make sure to choose projects that will provide a good return on investment, especially if you plan to sell your home within the next few years.
6. Debt Consolidation with a Lower Interest Rate
Consolidating high-interest debt with a home equity loan (HELOC) can help you cut your total interest rate and streamline your finances if you have credit card debt or personal loans. By paying off these higher-interest debts with a HELOC, you could save thousands of dollars in interest over time. Additionally, consolidating multiple debts into one monthly payment can make it easier to handle finances and reduce the risk of missing payments.
Before using a HELOC for debt consolidation, be sure to consider the risks. Your home is used as security, thus defaulting on the loan could lead to foreclosure. A HELOC, on the other hand, can be a great tool for homeowners who have a good repayment plan to lower their total debt and increase their financial security.
7. Emergency Fund Backup
Having a HELOC in place can provide peace of mind in case of an emergency. Whether it’s unexpected medical bills, major home repairs, or another large, unforeseen expense, a HELOC can serve as a safety net. Because you don’t have to draw on the funds until you need them, it’s a convenient way to ensure you have access to cash when needed without incurring unnecessary debt in advance.
Keep in mind, however, that it’s essential to manage a HELOC responsibly, as using it for non-essential expenses could lead to more debt over time.
Conclusion
A Home Equity Line of Credit offers numerous benefits, from flexible borrowing options and lower interest rates to the potential for tax savings and debt consolidation. An HELOC can be a great method to access your home’s equity on favorable terms, whether you’re trying to finance home improvements, debt consolidation, or emergency savings.
Before deciding if a HELOC is right for you, it’s important to assess your financial goals, the terms offered by various lenders, and your ability to repay the loan. To make sure a HELOC fits your financial needs and strategy, speak with a mortgage expert.