Now more than ever, our borrowers are looking for additional ways to have more flexibility with their money. That’s where a Home Equity Line of Credit comes in.
Independent of who originated the loan, this product offers current homeowners a simple way of tapping into your home’s equity when a cash-out refinance doesn’t make sense due to having a low interest rate on their current mortgage. It’s a popular option for accessing cash that can be used to consolidate and pay down debt, make home improvements, cover tuition and more.
This product allows qualified conventional borrowers to secure a new mortgage on the home while simultaneously opening a home equity line of credit. Doing so allows you with less available for a down payment to borrow additional money that can help avoid mortgage insurance. It’s also a great option with jumbo loan amounts who wants to qualify for a conforming loan instead.
A home equity line of credit (HELOC) is a type of revolving credit that uses your home as a collateral, or security for the debt.
A home equity line of credit works similarly to a credit card in the sense that you have the option to borrow money over time up to a set credit limit. It serves as a revolving line of credit, giving you access to a cash pool you can borrow from often, rather than borrowing a fixed amount in one instance. Then, you pay back the borrowed amount over time, plus interest.
In order to qualify for a HELOC, you will need to have available equity in your home. In other words, the value of your home must be more than what you owe.
You can typically borrow up to 80-90% of the value of your home minus whatever you owe.
A HELOC has two phases: the draw period and the repayment period.
Draw period: During the draw period, you can borrow from the credit line by check, transfer or a credit card linked to the account. Monthly minimum payments often are interest-only during the draw period, but you can pay principal if you wish. The length of the draw period varies; it’s often 10 years.
Repayment period: During the repayment period, you can no longer borrow against the credit line. Instead, you pay back the loan in monthly installments that include principal and interest. With the addition of principal, the monthly payments can rise sharply compared with the draw period. The length of the repayment period varies; it’s often 20 years.
With a HELOC, instead of borrowing a lump sum, you borrow money when you need it. Though your total credit line may be substantial, you only pay interest on the funds you actually use. HELOCs generally have adjustable interest rates, so HELOC rates fluctuate along with the market.
