If you own your home and plan to take out a substantial loan, a home equity line of credit can be a great option. These loans are flexible and have lower interest rates than alternatives like credit cards and personal loans.
What Is a Home Equity Line of Credit?
A home equity line of credit, often abbreviated as HELOC, is a revolving loan that uses your home equity as collateral. Unlike a home equity loan, HELOCs allow you to borrow money over multiple years, usually with variable interest rates. You'll usually be able to draw money from the line of credit as often as you'd like, and you'll only need to make interest payments during the initial draw period.
The Process of a Home Equity Line of Credit
When you apply for a HELOC, the lender will look at how much equity you have in your home, your credit score, your debt-to-income ratio, how much you earn, and how reliable your income is. Most banks require 20% equity in the home before you apply for a HELOC. Equity is determined by subtracting your remaining mortgage balance from the value of your home. Banks usually allow homeowners to borrow up to 85% of their equity. For example, if your home is worth $500,000 and your mortgage balance is $400,000, you would have 20% equity and may be able to borrow up to $85,000.
After you've been approved for a line of credit, there are two stages. HELOCs usually offer a ten-year draw period. During this time, you can borrow as much as you'd like up to the amount you were approved for, and you'll only be responsible for making interest payments. The rate is tied to prime, so it is variable as interest rates rise or fall, meaning your payments can increase or decrease along with interest rates.
Once the draw period ends, you will be responsible for repaying the outstanding balance. Customers can either pay off the loan or, if they qualify, refinance the debt with another HELOC. Many customers prefer to pay down the principal as well as the interest to avoid a large lump sum at the end of 10 years.
Who Would Benefit from a Home Equity Line of Credit?
Newer homeowners who put less than 20% down may not have enough equity to qualify for a HELOC. Otherwise, these lines of credit can be an excellent option for people who may need to borrow money multiple times over several years or don't know exactly how much they'll need. For example, HELOCs work well for home remodels renovations. These projects might happen in multiple stages. A HELOC allows borrowers to draw money when it's time to pay for each step rather than taking out multiple loans or committing to a larger budget upfront.
HELOC rates tend to be lower, sometimes much lower, than the interest rates for credit cards, so a HELOC can be an option for consolidating high-interest credit card debt. Some customers use HELOCs to cover unexpected expenses, such as medical bills not covered by health insurance or important home repairs that exceed their available cash reserves. Many customers turn to HELOCs for home improvements like a new kitchen or bathroom, justifying financing these home enhancements since home improvements can increase the overall value of their home once completed. Others draw from their HELOCs for once-in-a-lifetime events or splurges like a wedding, a dream vacation or a boat.
Are You Interested in a Home Equity Line of Credit?
If you're considering a home equity line of credit, your next step is to visit a branch or reach out to a Heritage Banker by email or telephone. Heritage Bank is locally owned and structured to move fast on loan applications.
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