As a homeowner, there may come a time when you need access to a large chunk of cash. Maybe you want to tackle a kitchen remodel or have a sizable debt you need to pay off. Regardless of why you need funds, a HELOC loan could help you get the money you need. What is a HELOC loan exactly? A home equity line of credit (HELOC) is a type of loan in which the borrower uses the equity in his or her home as a source of collateral. HELOCs provide homeowners with flexible borrowing terms and the ability to use the borrowed funds for any purpose they see fit.
What Is Home Equity?
A HELOC is an excellent option for homeowners looking to take out a low-interest loan. Home equity refers to the current value of your home minus your mortgage. With a home equity line of credit, you can borrow up to a certain amount of money for the life of the loan. During a set time limit established by the lender, you can continue to withdraw funds as needed to cover purchases and debts.
HELOC loans should not be confused with home equity loans, also known as term loans. With a home equity loan, the borrower receives a single lump sum that must be paid off based on a set schedule. A HELOC loan works more like a credit card by offering a line of credit from which you can draw money.
Determining Your Draw Period
Once you apply and are approved for a HELOC, you will have access to a line of credit that you can draw upon to pay for anything you wish. You will be able to obtain your funds with an access card (e.g. ATM or credit card), a checkbook, a bill pay option or an option to transfer funds online. However, know that this line of credit will not be available forever. Most lenders set a draw period that determines the term of the loan.
Many HELOCs start with a 5- to 10-year draw period. During this time, you will make interest-only payments each month. Once this draw period has ended, there will usually be a 10- to 20-year repayment period in which you must pay back the principal and interest and eventually pay off the loan.
Lifetime of a HELOC Loan
The length of a HELOC loan can vary from lender to lender and it is primarily based on the reason for the loan and the borrower’s ability to pay it back. However, a HELOC can run as long as 30 years, which consist of a 10-year draw period and a 20-year repayment period. When determining your draw period, your lender will look at how you are using the money. If you are simply paying a debt, you may not need a draw period that is as lengthy as someone who is undergoing a complete house renovation. What makes a HELOC so popular is that it is a revolving line of credit. This means that you can pay back some of the money and then withdraw funds later when you need it.
Risks and Fees
While a HELOC loan can be highly valuable to homeowners on a tight budget, they also pose certain risks. As you are putting your home’s equity as collateral, failure to pay back the loan could result in the loss of your house. In addition, taking out a HELOC also puts you at risk of having your credit line frozen or reduced. However, this usually only occurs if you miss payments or there is a major change in your home’s equity. Also, note that the interest rate on a HELOC can fluctuate due to changes in the market.
When setting up your HELOC, you may also face certain fees. Some of the most common fees associated with HELOCs include application fees, appraisal fees, attorney fees, upfront charges, title search fees, transaction fees, annual fees, and mortgage preparation and filing fees. These fees can greatly vary from lender to lender.
Learn More by Calling Mathis Title Today
A HELOC is essentially a second mortgage that can turn the value you have in your house into cash that can be accessed when you need it most. To qualify for a home equity line of credit, you will typically need to have a debt-to-income ratio in the lower 40s or less, as well as a good credit score. Most lenders also want you to have a home value that is a minimum of 15 percent more than you owe.
For more information about home equity lines of credit or to speak with a qualified professional about your options, schedule a consultation with the experts at Mathis Title Company at 703-865-7880.