How Does A Home Equity Line Of Credit (HELOC) Work?

A home equity line of credit (HELOC) is a type of mortgage loan that acts similar to a credit card, except the line of available credit is tied to your home’s equity. So instead of using funds advanced to you by a creditor, you use the cash from the value of your home.

HELOC Benefits

  • Lower Interest Rates  HELOC interest rates tend to be lower than personal loans or credit cards. 
  • You Only Pay For What You Use – You’re charged interest only if you withdraw funds. 
  • No Closing Costs – HELOCs often have low or no closing costs, making them an attractive alternative for small loan amounts. 

Applying For a HELOC

Similar to applying for a mortgage, there will be a credit review and a home appraisal. However, some lenders may only need to review the data regarding your property’s valuation and real estate market in the area, not a full appraisal. 

You’ll also need at least 20% equity in your home and a credit score of 620 or higher. Your debt-to-income ratio should be in the low 40s or less, with your credit history in good shape.

HELOC Draw Period

With a HELOC, you can borrow up to 80 percent of your home’s equity for the life of the loan, which lasts about 5-10 years. You can use as much or as little as you want and pay interest only on what you use, not the whole amount you were approved for.

HELOC Repayment Period

HELOCs repayment period usually lasts about 10 – 20 years, where you’ll make regular monthly payments on the principal and interest until it’s paid off. Remember that these payments are in addition to your regular mortgage payments. 

HELOC Vs. Home Equity Loan Vs. Refinance

Home Equity Loan

While a HELOC is considered a type of home equity loan, a home equity loan typically refers to borrowing a lump sum against your home. Remember that with a HELOC, you only borrow what you need and do so over an extended period.

Cash-Out Refi

With a cash-out refinance, you replace your current mortgage with a new one. You’ll have at least 20% of your equity in a lump sum along with new mortgage terms. Since a cash-out refi is a new loan, it also comes with closing costs (remember that HELOCs have no closing costs). However, you’ll only have a single payment to make to your lender versus a mortgage payment and HELOC payment with a home equity line of credit.

Is A HELOC Right For You?

Since every borrower has different needs, we offer various options for gaining access to your home equity. Whether it’s a flexibility of a HELOC you’re after or lowering your rate with cash out, we can match you with the best refi program. Contact us today for an obligation-free conversation.

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