Home values have risen dramatically in the last few years, and many homeowners would like to tap into their equity to make home improvements or go on a great vacation or even payoff some high interest credit cards, but they don’t want to refinance their primary mortgage because the rate they have is much better than today’s rates. If you purchased your home 2 years ago or more, chances are you have significant equity. Or maybe you have paid so much of the mortgage down that you’ve and now you wish you had held onto some of that cash.
Home Equity Lines of Credit (HELOCs) are a very popular option for homeowners in this very situation. They’re flexible loans that give you a lot of options and time to decide what you want to do with your equity. However they can also be a bit confusing because they don’t work like a more traditional home loan.
HELOCs Are Lines of Credit
HELOCs are unlike a traditional home equity loan, where you borrow a set amount all at once, and then repay it. HELOCs are lines of credit that they work much more like a credit card than a mortgage. You’re approved for a maximum amount that represents the most money you can charge to your HELOC (just like with a credit card), and your payments are based on how much of that line of credit you’ve used.
If you max out your HELOC, you can pay it down and charge again, just like with a credit card. Unlike a credit card, however, your home is being used as the security for this loan, so if you get in over your head, your home is at risk of foreclosure. So you must be very careful with this particular kind of credit line. Of course rates are almost always a lot lower than your credit card rates.
HELOCs Have Two Separate Loan Periods
HELOCs start out as open lines of credit, allowing you to charge or pay off as much as you wish at any given time. You’re usually expected to make at least an interest payment each month, but beyond that, you can charge a lot or a little and only pay based on the percentage of the credit line you’ve utilized. This is known as the “draw” period.
This period of the HELOC, where it functions as a line of credit, is usually about 10 years, but can be more or less, depending on the specific terms. Immediately following this period, your HELOC becomes a set loan, and you can no longer charge anything else to the line of credit.
In this repayment period, your HELOC becomes much more like a traditional second mortgage, with a payment that’s based on the amount of credit you ultimately used during the draw period. From here on, your payment is more or less fixed, but can vary if you have an adjustable-rate loan. The repayment period is usually about 20 years, but, again, can be different based on your agreement with your bank.
There is often a balloon payment due at the end of the repayment period, so if this is a concern for you, make sure that your loan either will fully amortize or that you’re paying extra each month to ensure your last payment takes your note to a zero balance.
Just like other home equity loans, you’ll need to qualify for a HELOC with a reasonable credit score (ask your lender for specifics), a debt-to-income ratio of about 40% or below, and a high amount of home equity. Most lenders won’t lend more than about 85% of your home’s equity back to you, in case of default.
There are exceptions to all of these rules of thumb, so it’s very important to understand the specifics of the loan program you have chosen. You’ll also need an appraisal to assess the current value of your home, as well as minimal closing paperwork to finalize and record the loan and there is typically an annual fee.
Need Help to Find Your HELOC Lender?
If you need a recommendation for a lending company to use for a HELOC – CALL me Jeff Howard, your realtor for life. I have a list of great lenders that I trust and I would be happy to recommend.
Do you have a need for commercial/industrial/retail buildings or land? Are you ready to buy or sell a home? Do you want a guaranteed cash offer? We can help you with all of that… just call us at 702 SELL NOW or click on this link to my website http://www.702SellNow.com
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