A HELOC, or Home Equity Line of Credit, is a revolving line of credit that helps you pay for large expenses or consolidate debt. It uses the equity you’ve built in your home as a baseline for what you can borrow and your home as collateral for the loan. The HELOC is one option that consistently offers high funding amounts with lower interest rates.
How much financing does a HELOC provide?
Since a HELOC is based on your home equity and assets, the amount of financing a HELOC provides depends on how much equity you have built up in your home. For example, if your home’s appraised value is $200,000, and you still owe $120,000, then you have $80,000 in equity. However, that doesn’t necessarily mean you can walk in and out with a line of credit for that full amount. Typically, a financial institution (bank or credit union) will only allow you to borrow up to 85 percent of your home’s value ($200,000 x .85 = $170,000) minus the amount you still owe on the home ($120,000). That means you may only qualify for a HELOC of $50,000.
Of course, you don’t have to accept a HELOC for that full amount if you don’t need to. One of the best parts of a line of credit is that you can withdraw from it as needed and make monthly payments only on what you’ve borrowed. So, if you do end up taking out that full $50,000 on a line of credit, but only need to use $20,000 to renovate your master bathroom, you only owe payments back on that $20,000 — not the full $50,000. Then, if you decide to pay off a high-interest credit card with another $3,000, you just add that to the amount you owe. In short, a HELOC is a great way to have liquid financial assets and only pay for them if you need to use them.
How is a HELOC different from a Home Equity Loan?
Typically, you’ll hear about a HELOC in comparison with its financial cousin, the Home Equity Loan, but they are very different. In addition to these popular options, there are a number of financing alternatives that you can use to find the cash for larger projects or goals — and all of them have their own pros and cons.
A HELOC is based on the equity you have in your home and is paid out in a revolving line of credit that you can access and pay back over a set amount of time (usually 15 or 30 years). Your payments are based only on the money you have spent, and you can spend, payback, and spend again, should you choose to. Finally, home equity lines of credit are usually subject to a variable rate, which is based on the current market.
Home Equity Loan
Similar to a HELOC, a home equity loan also depends on the equity you have in your home. The main difference is it is paid out in a lump sum and payments are based on the full loan amount. Payments also begin immediately. Unlike a HELOC, there is no fluidity to the credit — once it’s been distributed and paid back, the loan is considered executed in full. One of the benefits, however, is that a home equity loan is typically based on a fixed rate of interest and has set monthly payments — so there are no surprises on how much you owe month-to-month.
While a cash-out refinance scenario is also based on the amount of equity you have in the home, the process is quite different. It requires a full refinancing of your home. Once you have gone through the full process of appraisal and evaluation, any equity remaining is “cashed out” as your financial institution restructures a new payment plan. That cash is given to you as a singular lump sum.
Another option for a larger project budget is a personal loan, although these tend to have higher interest rates than loans or lines of credit based on home equity. For a secured personal loan, the financial institution will require collateral to leverage for payment — a car, a Certificate of Deposit, or some other asset of value. In an unsecured loan, you won’t be required to put up any collateral, but you’ll likely trade-off by paying a higher interest rate instead.
With a sinking fund, you forgo any loan or line of credit, and instead set up a personal savings account for a specific purpose. If you know that your new living room makeover will likely cost around $5,000, you’ll save $416 every month for a year. Unlike the other options as listed above, a sinking fund won’t show up on your credit and can be an excellent way to spend guilt-free.
What can a HELOC be used for?
A home equity line of credit can be used for virtually anything, but it’s important to gauge whether or not a particular debt is worth using a HELOC for. (For example, if the orthodontist is offering you a 0 percent interest payment plan, it may not make sense to pay for it out of a HELOC at 4 percent instead). Still, a HELOC is a widely-used option for mid- to large- purchases. Some of the most popular uses include:
- Home renovations
- Paying off high-interest credit cards
- Vacation pay-off
- College debt or incidentals
- Special projects
- Medical procedures or needs (orthodontia or minor surgery)
How do I get a HELOC?
The process for getting a home equity line of credit is relatively straightforward — and therefore, pretty simple. Although it may take a few weeks to get all the necessary pieces in order, you can expect a similar process, no matter where you apply.
1. Get things in order.
Getting a home equity line of credit isn’t an instantaneous process, so before you even apply, you’ll want to know if you are financially healthy enough to make it worth your time. Check your credit score and the current market rates in your area. Know how much you still owe and approximately what your home is worth so you can estimate your equity. You may find that you don’t have enough equity built up to match the monetary value you’re trying to get out of your loan or line of credit. If that’s the case, it’s better to know this before you begin the process.
2. Complete the application.
After the first step, you’ll fill out an application, either online or in the branch of the financial institution. Smaller lenders may request an in-person meeting to go over the details; others may have everything entirely online. It is also completely normal to have to provide tax returns, pay stubs, proof of ownership, or other forms of validation. Still, the application is pretty standard, and they’ll use this information — as well as a credit check — to validate whether your request is feasible. Also, keep in mind that some institutions may charge an application fee — sometimes near $100.
3. Initial decision is made.
After you’ve submitted your application and all the necessary paperwork, an underwriter will review your application and make a decision as to whether or not you are a wise investment for that institution. Sometimes, the underwriter is a person in your branch; other times, outside underwriters can be utilized. A local underwriter is beneficial because they can consider regional knowledge and get to know the specifics of your financial situation. But whether they are on-site or remote, the underwriter will be the first “yes” or “no” you receive in this process. If it’s a “yes,” they will then outline the terms of the agreement — how much they will offer and for how long, at what interest rate. If it’s a “no,” then it’s likely that they will also provide some suggestions for increasing your creditworthiness — like raising your credit score or paying off debt.
4. Appraisal and verification is completed.
If the underwriter gives you a “yes,” then it’s onward and upward. A formal appraisal will be scheduled to ensure your house is valued at the same amount as was applied for. Additionally, all the paperwork will be reviewed and validated. All of this is to verify the amount of equity you actually have in the house.
5. Close on the HELOC.
When it’s time for the formal closing, you’ll likely sit down with an attorney who will go through all the legal paperwork with you and have you sign everything in order. You, and anyone listed on the HELOC with you, will need to attend the closing.
6. Start your project.
It’s finally here — you have the cash to make magic happen! You may get some checks to use for your project or simply go to the branch and take your money out as you need it. Keep up with your payment and what you’ve spent, and you’ll be a HELOC pro in no time.
Whatever your financing goals may be, the member representatives here at Spero are here to help you achieve them! If you want to boost your savings, start a sinking fund, or apply for a HELOC or Home Equity Loan, we can help! Stop by any of our branches, give us a call to find out more, or apply online today.