Make Your Dreams Possible with a HELOC
For many homeowners, the house isn’t just a place to live—when used effectively, it can also be a powerful financial tool. One way to leverage this asset is through a Home Equity Line of Credit (HELOC). If you’re dreaming about investing in a renovation, a second home, or have another goal entirely, a HELOC can be a strategic tool to help you turn the dream into reality.
A HELOC is a revolving line of credit that allows homeowners to quickly and efficiently borrow against the equity built up in their home. Unlike a traditional loan that provides a lump sum, a HELOC works more like a credit card, borrowing as needed, up to a set limit, and repaying over time. Homeowners build home equity by paying down their mortgage balance, increasing the difference between the mortgage balance and home value. However, due to the recent rise in home values over the past five years, many homeowners have significant home equity, primarily from price appreciation.
To qualify for a HELOC, you must have sufficient home equity. Lenders assess the Loan-to-Value (LTV) ratio to determine how much credit they are willing to extend. LTV is calculated by dividing the outstanding loan balance by the current appraised value of the property. Most lenders allow borrowing up to 85% of the LTV, with some offering up to 95%. However, the exact amount you can borrow will depend on factors like your creditworthiness and the lender’s specific requirements. While you may not be able to borrow the full amount of your home equity, a HELOC can still be a valuable tool to help achieve your financial goals.
A home equity line of credit can be a flexible and cost-effective tool for funding major financial goals. Compared to other secured loans, such as construction loans and mortgages, HELOCs can be opened quickly without high closing costs. Additionally, HELOCs will have a lower interest rate than unsecured lines of credit, like credit cards.
A HELOC isn’t free money. While a HELOC can be a valuable financial tool, it’s important to consider the risks.
- Overspending: Borrow responsibly and within cash flow and longer-term financial plan constraints.
- Variable Interest Rates: Many HELOCs have variable rates, meaning payments could increase if interest rates rise. Prepare for increased monthly payments or select a fixed rate option.
- Fees: Opening a HELOC can incur costs, which depend on lenders and can include origination fees, appraisal fees, and closing costs. The lender will estimate these fees before closing, which should be carefully reviewed.
- Using Home as Collateral: A HELOC is secured by the home; defaulting on HELOC payments could put the home at risk of foreclosure.
If you’ve decided that a HELOC is a good option, opening one is similar to applying for a mortgage.
- Search & Shop: Search for a lender in your state that has favorable rates and terms. Compare terms, interest rates (fixed vs. variable), fees, and repayment options from different lenders to find the best deal.
- Application: Complete the lender’s application forms, which include gathering account statements, tax returns, and paystubs.
- Lender Assessment & Approval: Lenders appraise home value and evaluate credit scores, debt-to-income ratios, and employment histories to determine final eligibility and interest rates.
- Use & Repay: Access to the HELOC funds will be opened after the loan closes. The initial draw can be completed through checks or a linked checking account. The terms of the HELOC will be expressed before closing. The lender will define a draw period (typically 5–10 years). The draw period allows withdrawals from the available HELOC. During this time, payments are interest only. After this period, the repayment phase begins, requiring principal and interest payments over a set term (often 10–20 years).
A home equity line of credit can be a great way to tap into home value for strategic financial goals, but it is essential to weigh the benefits, risks, and impact on your financial plan. If you’re considering a HELOC or determining how to fund a specific goal, reach out to the team at Heritage Wealth Architects.