Over the last decade or so, homeowners have increasingly turned to home equity lines of credit, or HELOCs, to draw funds against the value of their property as needed. Overall, HELOC debt across the U.S. grew from $295.5 billion to $326.1 billion between 2021 and 2023 alone, and it is expected to grow even more this year.
Why? Well, as interest rates have continued to rise, acquiring a new mortgage or a cash-out refinance have been less attractive choices for current homeowners. Instead, undergoing renovations, making major purchases, or consolidating debt with a HELOC’s high limits and flexibility have been gaining in popularity.
Let’s discuss what a HELOC entails and why it may be a strategic financial decision for homeowners like you.
How to Get a HELOC
A HELOC is a line of credit that allows you to borrow money against the equity in your home. Unlike a traditional loan, where you receive a lump sum upfront, a HELOC gives you access to a revolving line of credit. This means you can withdraw funds up to a predetermined limit during a specified draw period.
During the draw period (typically 5 to 10 years), you can borrow money, pay it back, and borrow again, similar to a credit card. The interest rates on a HELOC are usually variable and tied to a benchmark rate, such as the prime rate. This means your interest rate may fluctuate over time.
Once the draw period ends, you enter the repayment period (usually 10 to 20 years). During this time, you can no longer withdraw funds and must start repaying the principal and interest on the outstanding balance. It’s important to note that if you fail to make the required payments, you may risk losing your home through foreclosure.
How Much Equity Do You Need for a HELOC?
The amount of equity you need for a HELOC varies depending on the lender’s requirements. Generally, lenders require you to have a minimum of 15% to 20% equity in your home. However, some lenders may have stricter criteria.
For example, if your home is valued at $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. To calculate the maximum HELOC amount you may qualify for, multiply your home’s value by the lender’s maximum loan-to-value ratio (LTV). If the lender has an 80% LTV ratio, you could potentially access up to $40,000 through a HELOC.
What Can You Use a HELOC For?
A HELOC provides flexibility since you can use the funds for various purposes. Some of the more recommended uses include:
- Home renovations or repairs
- Debt consolidation
- Emergency funds
Typically, lenders suggest against using a HELOC for these purposes, considering the risk or comparative rates involved:
- Education expenses
- Starting a business
Applying for a HELOC
Getting a HELOC involves several steps:
- Evaluate Your Equity: Determine how much equity you have in your home by subtracting the remaining mortgage balance from the current market value of your property.
- Shop Around: Research different lenders and compare their terms, interest rates, and fees to find the best HELOC option for your needs.
- Submit an Application: Once you’ve chosen a lender, complete the application process, which typically includes providing documentation such as income verification, credit history, and property appraisal.
- Get Approved: If your application is approved, the lender will determine the maximum amount you can borrow and the terms of your HELOC.
- Sign the Agreement: Review the terms and conditions of the HELOC agreement carefully before signing it. Make sure you understand the interest rates, repayment terms, and any associated fees.
Can You Refinance a HELOC?
Yes, you can refinance a HELOC just like any other loan. Refinancing a HELOC can be a smart move if you can secure a lower interest rate or if you want to change the terms of your loan. It’s important to consider the costs and benefits of refinancing before deciding.
Refinancing a HELOC involves applying for a new loan to pay off the existing HELOC. This can be done with the same lender or a different one. Make sure to compare offers from multiple lenders to ensure you get the best terms possible.
Final Considerations
Ultimately, a HELOC may be a better avenue for accessing credit than a credit card or an unsecured loan since the interest rates are typically lower while still providing high lending limits and flexibility. However, there are many variables to consider before you begin comparing rates and taking out a line of credit.
To help ensure you get the best terms on your HELOC, review your credit score and debt-to-income ratio (DTI). Consider whether a variable or fixed-rate term is a better fit for you based on your needs and goals. As always, be sure to ask potential lenders questions to see how they might tailor your terms.
Consider getting a HELOC from your local bank. When you’re ready to learn more about SouthEast Bank’s HELOC options, a member of our team is standing by to assist you! SouthEast Bank is an Equal Housing Lender and Member FDIC.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal, financial, or tax advice. An attorney, financial advisor, or tax advisor should be consulted on specific issues.
