All You Need to Know About HELOCs

Kitchen Blueprint Drawing Graduating Into Finished BuildIf you’re a homeowner in need of a bundle of cash, look no further than your own home. By tapping into your home’s equity, you may be eligible for a loan with a (generally) lower interest rate and easier eligibility requirements. One way to do this is by opening up a home equity line of credit, or a HELOC. Let’s take a closer look at HELOCs and why they can be an excellent option for cash-strapped homeowners. 

What is a HELOC?
A HELOC is a revolving credit line that allows homeowners to borrow money against the equity of their home, as needed. The HELOC is like a second mortgage on a home; if the borrower owns the entire home, the HELOC is a primary mortgage. Since it is backed by a valuable asset (the borrower’s home), the HELOC is secured debt and will generally have a lower interest rate than unsecured debt, like credit cards.

How much money can I borrow through a HELOC?
The amount of money you can take out through a HELOC will depend on your home’s total value. The amount you are eligible to borrow will be based on the current value of your home.  Many lenders will only offer homeowners a HELOC that allows the borrower to maintain a loan-to-value (LTV) ratio of 80% or lower; however, you may be eligible to borrow up to 90% here at SACFCU.

A quick way to find a good estimate of the maximum amount you can borrow with a HELOC is to multiply your home’s value by the LTV you desire (any number up to 90%). For example, if your home is valued at $250,000 and you wish to borrow 90% of your homes value, multiple 250,000 by 0.90. This will give you $225,000. Subtract the amount you still owe on your mortgage (let’s assume $150,000) and you’ll have the maximum amount you can borrow using a HELOC: $75,000. 

Is every homeowner eligible for a HELOC?
Like every loan and line of credit, HELOCs have eligibility requirements. Exact criteria will vary, but the decision will be based on multiple factors such as your debt-to-income ratio, credit score, the appraised value of your home, and others.

How does a HELOC work?
A HELOC works similarly to a credit card. Once you’ve been approved, you can borrow as much or as little as needed, and whenever you’d like during a period of time known as the draw period. The draw period lasts 10 years. Once the draw period ends, you will have up to 9 years to repay the balance of the loan, or chose to refinance to a new HELOC. 

How do I repay my HELOC?
You will make monthly payments based on a percentage of your outstanding balance. For example, if you owe $10,000 on your HELOC, you would multiple 10,000 by 0.0075. This will give you your monthly payment of $75.00. Once your draw period is over, you will be given a set payment amount based on the remaining 9 year term.

How can I use the funds in my HELOC?
There are no restrictions on how you use the money in your HELOC. 

How is a home equity line of credit different from a home equity loan?
Like a HELOC, a home equity loan is a loan in which the borrower uses the equity of their home as collateral. Here, too, the exact amount you can borrow will depend on your LTV ratio, credit score and debt-to-income ratio.

However, there are several important distinctions between the two. Primarily, in a home equity loan, the borrower receives all the funds in one lump sum. A HELOC, on the other hand, offers more freedom and flexibility as the borrower can take out funds, as needed, throughout the draw period. Repayment for home equity loans also works differently; the borrower will make steady monthly payments toward the loan’s interest and principal over the fixed term of the loan. 

A home equity loan can be the right choice for borrowers who know exactly how much they need to borrow and would prefer to receive the funds up front. Some borrowers, however, would rather have the flexibility of a HELOC which allows them to borrow the money as needed (as many times as your rate of repayment will allow). 

If you’re a homeowner in need of some extra cash, consider taking out a HELOC by stopping by any of our 4 offices, calling us, or by applying for a HELOC online!