%20-%20website.png)
What Is a HELOC? (Home Equity Line of Credit)
By Jacqueline O'Shaughnessy, Loan Officer / Private Capital, NMLS #382900 — South Wind Financial, Inc, NMLS #9462 — Las Vegas, NV @themortgageRX
A Home Equity Line of Credit (HELOC) allows you to borrow against the equity you have built in your home. Your equity is essentially the difference between what your home is worth and what you currently owe against it.
Unlike a traditional loan where you receive one lump sum of money, a HELOC works more like a revolving line of credit, similar to a checking account. You are approved for a maximum credit line and can borrow from it as needed during the draw period. As you repay what you borrow, those funds may become available to use again.
One of the biggest reasons homeowners consider a HELOC is that it allows them to access their equity without refinancing their existing first mortgage. If you already have a favorable interest rate on your mortgage, replacing the entire loan with a cash-out refinance may not always make sense. A HELOC can provide another way to access cash while leaving that first mortgage in place. HELOCs can be useful, but they are loans secured by your home. Before opening one, it is important to understand how the interest rate, payments, draw period and repayment period work.
HELOC Frequently Asked Questions
1. How does a HELOC work?
Once your HELOC is approved, you receive a credit limit based on factors that include your home's value, existing mortgage balance and the lender's qualifying guidelines. During the draw period, you can generally borrow from the available line as needed rather than taking the entire amount at once.
2. How much can I borrow with a HELOC?
The amount available depends on your home's value, how much you currently owe against the property and the lender's guidelines. You'll sometimes hear this discussed as combined loan-to-value (CLTV) because the lender considers both your existing mortgage and the proposed HELOC in relation to the property's value. The standard is 80% LTV combining your first and HELOC second. There isn't one universal HELOC percentage that applies to every homeowner or every lender.
3. How are HELOC payments calculated?
That depends on the HELOC. During the draw period, some programs allow interest-only payments, while others require payments toward both principal and interest. Your payment also depends on how much of the available line you have actually borrowed. This is an important detail to understand before opening the line because the payment structure can change once the draw period ends, typically in 10 to 15 years.
4. Are HELOC interest rates fixed or variable?
HELOCs typically have variable interest rates, which means the interest rate—and therefore your payment—can change over time. The rate is generally based on an index plus a lender's margin. Some HELOC programs also allow borrowers to convert part of the outstanding balance to a fixed rate.
5. Does a HELOC change my current mortgage?
Generally, no. If you already have a first mortgage, a HELOC is typically an additional loan secured by the property rather than a replacement for your existing mortgage. It is considered a second trust deed. That means you continue making your regular first-mortgage payment in addition to any required HELOC payment.
This can be a huge benefit when your existing mortgage has an interest rate you don't want to give up.
6. What can I use HELOC funds for?
HELOC funds can generally be used for a variety of purposes. Homeowners may use their equity for home improvements, major expenses, debt consolidation, education or other financial needs.
The important thing to remember is that your home secures the debt. Turning other expenses into debt secured by your house deserves careful consideration because failure to repay can ultimately put the home at risk.
7. What happens when the HELOC draw period ends?
Once the draw period ends, typically 10 to 15 years, you can no longer continue borrowing from the line and the HELOC enters its repayment phase. Depending on the terms of the HELOC, repayment may occur over a number of years. Payments can increase substantially when the loan moves from the draw period into repayment. This is one of the most important terms to understand before opening a HELOC.
8. What is the difference between a HELOC and a cash-out refinance?
A HELOC is an additional line of credit secured by your home. Your existing first mortgage generally remains unchanged.
With a cash-out refinance, your existing mortgage is replaced with a new, larger mortgage, and you receive a portion of the difference in cash.
Which option makes more sense depends on your existing mortgage rate, how much equity you want to access, how you plan to use the money and the costs and terms of each loan.
9. When does a HELOC make sense?
A HELOC may make sense when you have substantial equity in your home, need access to funds over time rather than all at once, and don't necessarily want to refinance your existing first mortgage.
For example, someone completing renovations in stages may prefer having access to a credit line instead of borrowing the entire amount on day one. The right choice depends on your individual financial situation and what you're trying to accomplish.
10. What should I consider before opening a HELOC?
Don't look only at the initial payment or advertised interest rate. Ask about:
The draw and repayment periods
Whether the rate is variable
How the rate is calculated
How minimum payments are calculated
Closing costs and other fees
Annual or inactivity fees
Whether there is a minimum initial draw
Whether a fixed-rate conversion option is available
What happens to the payment when the draw period ends
HELOC fees can vary considerably by lender and may include application, origination, appraisal, title, annual, inactivity, cancellation or conversion fees.
Is a HELOC Right for You?
A HELOC can be a useful way to access the equity you've built in your home, particularly when you want to preserve your existing first mortgage. But just because you have equity available doesn't automatically mean borrowing against it is the right decision.
Before you refinance your first mortgage or open a HELOC, compare the numbers. Sometimes preserving your existing mortgage and adding a HELOC makes sense. Other times, a home equity loan or cash-out refinance may be the better option.
The goal isn't simply to get access to cash. It's to determine which financing structure makes the most sense for what you're trying to accomplish.
Ready to Take the Next Step?
📞 Schedule a complimentary 15-minute mortgage consultation today. 702.429.3994
Jacqueline O'Shaughnessy
South Wind Financial, Inc
6655 W. Sahara Ave., suite D114
Las Vegas, NV 89148
702-429-3994 cell
Co NMLS 9462 |Jo NMLS 382900
Continue Reading
Comments