Home Equity Line of Credit (HELOC)

A HELOC loan, or home equity line of credit, is an option for homeowners to take out a loan against their home’s equity, which builds up over time. Unlike a conventional loan, where you receive a lump sum upfront, a HELOC provides a line of credit based on the value of your home’s equity. This means you can borrow as little or as much as you need, up to the loan’s limit. In practice, it’s similar to using your credit card to make purchases, except your credit limit is determined by the value of your home equity rather than the type of credit card you have. 

Furthermore, HELOCs offer a draw period, typically a few years, during which the borrower can access funds. Following this period, the loan transitions into the repayment phase, where the borrowed amount and interest are repaid. 

A HELOC operates similarly to a credit card. You have a pre-approved credit limit and can borrow up to that amount as needed. The major difference is that a HELOC uses your home as collateral, meaning the loan is secured against the equity in your house. 

The amount you can borrow typically depends on the value of your home and how much equity you have. If your equity is worth more, then you’ll typically have a higher credit limit and vice versa. 

Interest rates for HELOCs are variable, meaning they can fluctuate based on market conditions. While you only pay interest on the amount you borrow, it’s essential to be aware that the rates can rise or fall based on market indexes. 

When comparing how a home equity loan works to a HELOC, the big difference is how the money is disbursed.  A home equity loan disburses funds all at once, requiring repayment over a specified period. On the other hand, a HELOC offers a line of credit up to a set limit, allowing you to borrow any amount up to that maximum. Once a home equity loan is paid off, it’s considered settled. On the other hand, a HELOC remains open for borrowing.

The interest dynamics differ too. Home equity loans come with a fixed interest rate throughout the loan’s duration, while a HELOC typically comes with an adjustable interest rate. As a result, you could have multiple draws against your HELOC, each with its own distinct interest rate. To understand these differences in depth, check out our post about the key differences between a HELOC vs home equity loan.

To secure a HELOC, you’ll have to meet a few basic requirements. A few key qualifications you’ll need to meet include:

• Equity Value: A significant amount of equity in your home is often required, with many lenders stipulating a minimum of 20% equity for eligibility. While there’s a cap to how much you can borrow, increasing your equity improves your borrowing potential.
• Stable Income: Lenders will assess your income to ensure that you’re able to manage repayments. Consistent income is paramount for primary and secondary mortgages, proving your capability to meet monthly obligations.
• Credit Standing: A credit score in the mid to high 600s is generally favored by lenders, as this demonstrates that a borrower can be trusted to repay their debts. The exact score varies among lenders, but enhancing your score can positively influence your loan amount and terms.
• Payment History: Lenders analyze your credit history to gauge your reliability in managing debts. If you’ve consistently honored your existing mortgage payments, especially with the same lender, it bolsters your chances of HELOC approval.
• DTI Ratio: The debt-to-income (DTI) ratio indicates the portion of your income allocated for debt repayments, including mortgages and other loans. Typically, lenders seek a DTI below 43%, but a lower ratio further strengthens your application.

The home equity line of credit offers multiple benefits, making it a go-to for many homeowners. Below, we’ve highlighted some of its significant advantages:

• Flexibility: Unlike traditional loans, a HELOC provides the flexibility to borrow as needed, meaning it can be used to cover a variety of expenses. This flexibility ensures you only borrow and pay interest on what you need.
• Potentially Lower Interest Rates: HELOCs often have interest rates lower than credit cards or personal loans, making them a great debt consolidation option in many cases. 
• Tax Deductions: Interest payments on a HELOC can be tax-deductible if the funds are used for home improvements. Be sure to talk to your accountant or lender to learn more. 
• Continued Access to Funds: Even after repaying what you’ve borrowed, the line of credit can remain open, so you can draw more money if you need it.
• Control Over Expenditure: Borrowers can use the funds for virtually any purpose, from home renovations to emergency expenses. You control how you spend the money.

While a HELOC offers several benefits, it’s also crucial to be aware of potential drawbacks. A few examples include:

• Variable Interest Rates: HELOCs typically come with variable interest rates, which can add an element of unpredictability to this type of financing. 
• Risk to Your Home: Since your home is used to secure the HELOC, you run the risk of foreclosure if you default on the loan. Be sure to read the terms and stay on top of the repayment schedule to avoid this.
• Potential for Overspending: The ease of access to funds might tempt some borrowers to overspend, leading to financial strain in the long run. It’s crucial to have a financial plan in place when taking out a HELOC and to be disciplined in how you use it. Download the Griffin Gold app to formulate a personalized financial plan, track your spending, leverage smart budgeting tools, and access valuable home financing resources. 

It’s essential to weigh these pros and cons carefully to make an informed decision. Be sure to reach out to an expert if you have additional questions about how a HELOC works. 

Whether you’re eyeing home improvements, managing unexpected expenses, or consolidating debt, a home equity line of credit could be the answer. Reach out to Griffin Funding today to speak to mortgage professionals about whether a HELOC is the right option for you. 

At Griffin Funding, we offer extensive resources and expertise to guide you through the process. We can help you understand your tappable equity and walk you through the HELOC application process. Contact us today to speak to our team, and let us help you find the perfect loan option for you.